Form 10-K
Table of Contents
Index to Financial Statements

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

(Mark One)

 

x

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

    

For the fiscal year ended December 31, 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 No. 13-2607329

1301 RIVERPLACE BOULEVARD

JACKSONVILLE, FL 32207

(Principal Executive Office)

Telephone Number: (904) 357-9100

Securities registered pursuant to Section 12(b) of the Exchange Act,

all of which are registered on the New York Stock Exchange:

Common Shares

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES x        NO  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.        YES ¨        NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

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 the definitions 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  ¨

   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

The aggregate market value of the Common Shares of the registrant held by non-affiliates at the close of business on June 30, 2010 was $3,497,091,557 based on the closing sale price as reported on the New York Stock Exchange.

As of February 11, 2011, there were outstanding 81,072,140 Common Shares of the registrant.

Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the 2011 annual meeting of the shareholders of the registrant scheduled to be held May 19, 2011, are incorporated by reference in Part III hereof.

 

 


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

Item

      

Page

 
  PART I  

1.

 

Business

    1   

1A.

 

Risk Factors

    6   

1B.

 

Unresolved Staff Comments

    13   

2.

 

Properties

    13   

3.

 

Legal Proceedings

    14   
  PART II  

5.

 

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    15   

6.

 

Selected Financial Data

    17   

7.

 

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

    20   

7A.

 

Quantitative and Qualitative Disclosures about Market Risk

    35   

8.

 

Financial Statements and Supplementary Data

    36   

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    36   

9A.

 

Controls and Procedures

    36   

9B.

 

Other Information

    36   
  PART III  

10.

 

Directors, Executive Officers and Corporate Governance

    37   

11.

 

Executive Compensation

    37   

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    37   

13.

 

Certain Relationships and Related Transactions, and Director Independence

    37   

14.

 

Principal Accounting Fees and Services

    37   
  PART IV  

15.

 

Exhibits, Financial Statement Schedules

    38   

 

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Index to Financial Statements

INDEX TO FINANCIAL STATEMENTS

 

     Page  

Management’s Report on Internal Control over Financial Reporting

     F-1   

Reports of Independent Registered Public Accounting Firm

     F-2   

Consolidated Statements of Income and Comprehensive Income for the Three Years Ended December  31, 2010

     F-4   

Consolidated Balance Sheets at December 31, 2010 and 2009

     F-5   

Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2010

     F-6   

Notes to Consolidated Financial Statements

     F-7   
INDEX TO FINANCIAL STATEMENT SCHEDULES   

Schedule II — Valuation and Qualifying Accounts

     F-47   

All other financial statement schedules have been omitted because they are not applicable, the required matter is not present, or the required information has been otherwise supplied in the financial statements or the notes thereto.

  

Signatures

     F-48   

Exhibit Index

  

 

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Index to Financial Statements

PART I

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 Consolidated Financial Statements of Rayonier Inc. included in Item 8 of this Report.

Note About Forward-Looking Statements

Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier’s future financial and operational performance, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expect,” “estimate,” “believe,” “anticipate” and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements. The risk factors contained in Item 1A—Risk Factors, among others, could cause actual results to differ materially from those expressed in forward-looking statements that are made in this document.

Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward- looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.

 

Item 1. BUSINESS

General

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 own, lease or manage approximately 2.4 million acres of timberland and real estate located in the United States and New Zealand. We believe that Rayonier is the seventh largest private timberland owner in the U.S. Included in this property is approximately 0.2 million acres of high value real estate located primarily along the coastal corridor from Savannah, Georgia to Daytona Beach, Florida. We own and operate two specialty cellulose mills in the United States. In addition, we manufacture lumber in three sawmills in Georgia and engage in the trading of logs. For information on sales, operating income and identifiable assets by reportable segment, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 4 — Segment and Geographical Information.

Our corporate strategy is to:

 

   

Increase the size and quality of our timberland holdings through cash-accretive timberland acquisitions while selling timberland that no longer meets our strategic or financial return requirements.

 

   

Extract maximum value from our higher and better use (“HBU”) properties. This includes entitling development property and maintaining a rural HBU sales program for conservation, recreation and industrial uses.

 

   

Differentiate our Performance Fibers business by developing and improving customer specific applications. We emphasize operational excellence to ensure quality, reliability and efficiency. We are also evaluating the conversion of our absorbent material production line at the Jesup, Georgia mill to produce cellulose specialties.

We originated as the Rainier Pulp & Paper Company founded in Shelton, Washington in 1926. In 1937, we became “Rayonier Incorporated,” a public company traded on the New York Stock Exchange (“NYSE”), until 1968 when we became a wholly-owned subsidiary of ITT Corporation (“ITT”). On February 28, 1994, Rayonier again became an independent public company after ITT distributed all of Rayonier’s Common Shares to ITT stockholders. Our shares are publicly traded on the NYSE under the symbol RYN. We are a North Carolina corporation with executive offices located at 1301 Riverplace Boulevard, Jacksonville, Florida 32207. Our telephone number is (904) 357-9100.

The Company is a Real Estate Investment Trust (“REIT”). Under this structure, we are generally not required to pay federal income taxes on our earnings from timber harvest operations and other REIT-qualifying activities contingent upon meeting applicable distribution, income, asset, shareholder and other tests.

 

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Index to Financial Statements

In July 2010, we completed a reorganization of our operating structure by forming a new operating entity, Rayonier Operating Company LLC (“ROC”), that will allow us to become an umbrella partnership real estate investment trust (“UPREIT”). The UPREIT structure will enable us to acquire timberland assets and other properties by issuing ROC equity interests to sellers. Currently, ROC is wholly-owned by Rayonier.

Our principal businesses are conducted through two entities. Our U.S. timber operations are primarily conducted by a wholly-owned REIT subsidiary, Rayonier Forest Resources, L.P. Our non-REIT qualifying operations, which are subject to corporate-level tax, are held by our wholly-owned taxable REIT subsidiary, Rayonier TRS Holdings Inc. (“TRS”). These operations include our Performance Fibers, Wood Products and trading businesses, as well as the sale and entitlement of HBU properties.

Timber

Our Timber segment owns, leases or manages approximately 2.3 million acres of timberlands, and sells standing timber (primarily at auction to third parties) and delivered logs. We also generate non-timber income from other land related activities. See chart in Item 2 — Properties for additional information.

Our Eastern U.S. timberland holdings consist of approximately 1.6 million acres in Alabama, Arkansas, Florida, Georgia, Louisiana, New York, Oklahoma and Texas. The predominant tree species across these timberlands are loblolly and slash pine. Hardwoods include red oak, sweet gum, black gum, red maple, cypress, black cherry, sugar maple and yellow birch. Our Eastern U.S. timber is primarily a mix of sawtimber and pulpwood. The average rotation (harvest) age for timber from the Eastern U.S. (primarily Southern pine), excluding New York, is between 21 and 24 years. Due to slower timber growth rates, the harvest age on the New York timberlands (primarily specialty hardwoods) ranges widely from 40 to 80 years. End-use markets for our Eastern timber include pulp, paper and wood products facilities.

Our Western U.S. timberlands consist of approximately 0.4 million acres of primarily second and third growth softwood timber in western Washington with approximately 51 percent hemlock, 36 percent Douglas-fir and the remainder western red cedar, spruce and red alder. Rotation age for timber from the Western U.S. ranges from 35 to 50 years, and is primarily composed of sawtimber.

In addition, we have a 26 percent interest in a New Zealand joint venture (“JV”), which we manage. The JV owns or leases approximately 0.3 million acres of primarily radiata pine timberland.

Merchantable timber inventory is an estimate of timber volume based on the earliest economically harvestable age. Estimates are based on an inventory system that involves periodic statistical sampling. Adjustments are made on the basis of growth estimates, harvest information, environmental restrictions and market conditions. Timber located in swamplands, restricted or environmentally sensitive areas is not included in the merchantable inventory shown below.

The following table sets forth the estimated volumes of merchantable timber in the U.S. by location and type, as of December 31, 2010:

 

Location

   Softwood      Hardwood      Total      Equivalent total,
in thousands of
short green tons
     %  

Eastern, in thousands of short green tons

     32,885         20,639         53,524         53,524         84   

Western, in millions of board feet

     1,208         72         1,280         9,987         16   
                          
              63,511         100   
                          

We manage our timberlands in accordance with the requirements of the Sustainable Forestry Initiative® (“SFI”) program, a comprehensive system of environmental principles, objectives and performance measures that combines the perpetual growing and harvesting of trees with the protection of wildlife, plants, soil and water quality. Through application of our site-specific silvicultural expertise and financial discipline, we manage timber in a way that optimizes site preparation, tree species selection, competition control, use of fertilization and timing of thinning and final harvest. We also have a genetic tree improvement program aimed to enhance the productivity and quality of our timber. In addition, non-timber income opportunities associated with our timberlands such as recreational licenses and specialty forest products, as well as considerations for the future higher and better uses of the land, are integral parts of our site-specific management philosophy. All these activities are designed to maximize value while complying with SFI requirements.

 

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Real Estate

Our Real Estate subsidiary owns approximately 0.1 million acres of land. We segregate our real estate holdings into three groups: HBU development, HBU rural (including conservation properties) and non-strategic timberlands. Development properties are predominantly located in the 11 coastal counties between Savannah, Georgia and Daytona Beach, Florida. Our strategy is to pursue and obtain entitlements for selected development properties, to sell rural properties at a premium to timberland values and to divest non-strategic timberland holdings that do not meet our investment criteria.

Performance Fibers

We are a leading manufacturer of high value specialty cellulose fibers and absorbent materials with production facilities in Jesup, Georgia and Fernandina Beach, Florida, which have a combined annual capacity of approximately 745,000 metric tons. These facilities manufacture more than 25 different grades of fibers. The Jesup facility can produce approximately 590,000 metric tons, or 79 percent of our total capacity, and the Fernandina Beach facility can produce approximately 155,000 metric tons, or 21 percent of our total capacity. This segment has two major product lines:

Cellulose specialties — We are a leading producer of specialty cellulose products, most of which are used in dissolving chemical applications that require a highly purified form to produce cellulose acetate and ethers that create high value, technologically demanding products. Our products are used in a wide variety of end uses such as: cigarette filters, liquid crystal display screens, acetate textile fibers, pharmaceuticals, cosmetics, rigid packaging, photographic film, impact-resistant plastics, high-tenacity rayon yarn for tires and industrial hoses, detergents, food casings, food products, thickeners for oil well-drilling muds, lacquers, paints, printing inks and explosives. In addition, cellulose specialties include high value specialty paper applications used for decorative laminates, automotive air and oil filters, shoe innersoles, battery separators, circuit boards and filter media for the food industry.

Absorbent materials — We are a producer of fibers for absorbent hygiene products. These fibers are typically referred to as fluff fibers and are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes, and non-woven fabrics.

Approximately 61 percent of Performance Fibers sales are exported, primarily to customers in Asia and Europe. Approximately 95 percent of Performance Fibers sales are made directly by Rayonier personnel, with the remainder through independent sales agents. We have long-term contracts with the world’s largest manufacturers of acetate-based products and other key customers that extend into 2013 and 2014 and represent a significant majority of our high value cellulose specialties production.

We are currently in the evaluation stage to convert our existing absorbent materials line at Jesup, Georgia to produce high purity cellulose specialties. The evaluation is expected to be completed in mid-year 2011, and if the project is approved, production would be scheduled to begin in 2013. The project is estimated to cost between $250 million and $300 million. The new line would increase capacity for high purity cellulose specialties by approximately 190,000 metric tons, while eliminating all absorbent materials capacity of approximately 260,000 metric tons.

Wood Products

Our Wood Products business segment manufactures and sells dimension lumber. We operate three lumber manufacturing facilities in the U.S. that produce Southern pine lumber, which is generally used for residential and industrial construction. Located in Baxley, Swainsboro and Eatonton, Georgia, the mills have a combined annual capacity of approximately 375 million board feet of lumber and 700,000 short green tons of wood chips. In 2010, we continued to operate at reduced production levels due to decreased demand from a weak housing market and expect to operate at reduced production levels in 2011 unless market conditions improve.

Lumber sales are primarily made by Rayonier personnel to customers in the southeastern U.S. Approximately 73 percent of our lumber mills’ wood chip production is sold at market prices to our Jesup, Georgia performance fibers facility. In 2010, these purchases represented approximately 11 percent of that facility’s total wood consumption.

 

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Other

The primary business of our Other segment is trading logs.

Discontinued Operations and Dispositions

Included in the Consolidated Balance Sheets are environmental liabilities relating to prior dispositions and discontinued operations, which include our Port Angeles, Washington performance fibers mill that was closed in 1997; our wholly-owned subsidiary, Southern Wood Piedmont Company (“SWP”), which ceased operations other than environmental investigation and remediation activities in 1989; our Eastern Research Division, which ceased operations in 1981; and other miscellaneous assets held for disposition. See Note 14 — Liabilities for Dispositions and Discontinued Operations for additional information.

Foreign Sales and Operations

Sales from non-U.S. operations comprised approximately seven percent of consolidated 2010 sales. See Note 4 — Segment and Geographical Information for additional information.

Intellectual Property

We own numerous patents, trademarks and trade secrets, and have developed significant know-how, particularly relating to our Performance Fibers business. We intend to continue to take such steps as are necessary to protect our intellectual property, including filing patent applications for inventions that are deemed important to our business operations. Our U.S. patents generally have a duration of 20 years from the date of filing.

Competition

Timber markets in both our Eastern and Western regions are relatively fragmented. In the Eastern region, we compete with Plum Creek Timber Company, Timberland Investment Management Organizations (“TIMO”) such as Hancock Timber Resource Group, Resource Management Services, Forest Investment Associates and The Campbell Group, and other numerous large and small privately held timber companies. In the Western region, Weyerhaeuser, Hancock Timber Resource Group, Green Diamond Resource Company, Longview Timber, The Campbell Group, Port Blakely Tree Farms, Pope Resources and the State of Washington Department of Natural Resources are significant competitors. Other competition in the Western region consists of log imports from Canada. In all markets, price is the principal method of competition.

In Performance Fibers, we market high purity, specialty cellulose fibers worldwide against competition from domestic and foreign producers. Major competitors include Buckeye Technologies, Borregaard, Neucel, Sappi Saiccor, Sateri Holdings and Tembec. Product performance, technical service and price are principal methods of competition. During 2010, Cosmo Specialty Fibers announced plans to re-open a specialty cellulose fiber mill located in Cosmopolis, Washington, which was closed in 2006 by its previous owner, Weyerhaeuser. Additionally, Sateri Holdings announced in December 2010 plans to expand the capacity of its specialty cellulose fiber production line in Bahia, Brazil. The new market capacity is not expected to adversely affect the results of our Performance Fibers segment in 2011. However, it is difficult to determine how market dynamics may impact our business in 2012 and beyond.

Additionally, in Performance Fibers we market absorbent materials against competition from domestic and foreign producers. Major competitors include Weyerhaeuser, GP Cellulose, Domtar and International Paper. Price and customer service are the principal methods of competition.

Our Wood Products business competes with a number of lumber producers throughout the U.S. and Canada, but particularly with sawmills throughout Georgia and Florida. Our Wood Products business represents a de minimus amount of North American capacity.

Customers

In 2010, a group of customers under the common control of Eastman Chemical Company (and its affiliates) and Celanese represented approximately 20 and 15 percent of our Performance Fibers segment’s sales, respectively, and 14 and 10 percent of consolidated sales, respectively. The loss of either of these customers could have a material adverse effect on the Company and the Performance Fibers segment’s results of operations.

 

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Seasonality

Our Western region’s timber sales are generally lower in the third quarter due to greater availability of non-Rayonier timber during the drier summer harvesting period. Our Wood Products segment may experience higher seasonal demand in the second and third quarters when demand for new housing has typically increased. Our Performance Fibers and Real Estate segments’ results are normally not impacted by seasonal changes.

Environmental Matters

See Item 1A — Risk Factors, Item 3 — Legal Proceedings, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental Regulation, and Note 14 — Liabilities for Dispositions and Discontinued Operations.

Raw Materials

The manufacturing of our Performance Fibers products and lumber requires significant amounts of wood. Timber harvesting can be restricted by stringent regulatory requirements, adverse weather conditions and legal challenges from various environmental groups. The supply of timber is directly affected by price and demand fluctuations in wood products, pulp and paper markets, and weather.

Our Performance Fibers and lumber mills obtain their logs primarily through open market purchases made by our wood procurement organization, which negotiates prices and volumes with independent third party suppliers who deliver to our facilities. A limited amount of Performance Fibers log purchases are made directly from the Timber segment at prevailing market prices.

Our Performance Fibers mills utilize a significant amount of chemicals, most of which are purchased under supply agreements at prevailing market prices.

Our Performance Fibers mills use a substantial amount of residual biomass to produce their own energy, but also require significant amounts of fuel oil and natural gas. These raw materials are subject to significant changes in prices and availability. To reduce cost, we have completed a number of capital projects in recent years to reduce fossil fuel consumption, including a power boiler replacement at our Fernandina Beach, Florida facility, which consumes primarily wood waste. We continually pursue reductions in usage and costs of other key raw materials, supplies and contract services at our Performance Fibers and lumber mills and do not foresee any material constraints in the near term from pricing or availability.

Research and Development

The research and development efforts of our Performance Fibers business are primarily directed at further developing existing core products and technologies, improving the quality of cellulose fiber grades, absorbent materials and related products, improving manufacturing efficiency and environmental controls, and reducing fossil fuel consumption.

The research and development activities of our timber operations include genetic tree improvement and applied silvicultural programs to identify management practices that will improve financial returns from our timberlands.

Employee Relations

We currently employ approximately 1,800 people, of whom approximately 1,700 are in the United States. Approximately 900 of our hourly Performance Fibers employees are covered by collective bargaining agreements. The majority of our hourly employees are represented by one of several labor unions. We believe relations with our employees are satisfactory.

Availability of Reports and Other Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant to Sections 13(a) or 14 of the Securities Exchange Act of 1934 are made available to the public free of charge in the Investor Relations section of our website www.rayonier.com, shortly after we electronically file such material with, or furnish them to, the Securities and Exchange Commission (“SEC”). Our corporate governance guidelines and charters of all Committees of our Board of Directors are also available on our website.

 

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Item 1A. RISK FACTORS

Our operations are subject to a number of risks, including those listed below. When considering an investment in our securities, you should carefully read and consider these risks, together with all other information in this Report. If any of the events described in the following risk factors actually occur, our business, financial condition or operating results, as well as the market price of our securities, could be materially adversely affected.

Business and Operating Risks

The cyclical nature of our businesses could adversely affect our results of operations.

Our financial performance is affected by the cyclical nature of the forest products and real estate industries. The markets for timber, real estate, performance fibers and wood products are influenced by a variety of factors beyond our control. For example, the demand for real estate can be affected by changes in interest rates, availability and terms of financing, local economic conditions, the employment rate, new housing starts, population growth and demographics. The demand for sawtimber is primarily affected by the level of new residential and commercial construction activity, and currently sawtimber pricing continues to be below historic levels. The supply of timber and logs has historically increased during favorable pricing environments, which then causes downward pressure on prices. Both our Real Estate and Timber businesses have been negatively impacted by the current economic downturn, primarily due to the decline in housing starts, excess supply of existing housing inventory, unemployment and the tightening of credit availability for real estate and construction related projects.

The forest products and real estate industries are highly competitive.

Some of our competitors in the forest products businesses have greater financial and operating resources and own more timberlands than we do. Some of our forest products competitors may also be lower-cost producers in some of the businesses in which we operate. In addition, wood products are subject to significant competition from a variety of non-wood and engineered wood products. We are also subject to competition from various forest products, including logs and pulp products imported from foreign countries to the United States as well as to the export markets served by us. To the extent there is a significant increase in competitive pressures from substitute products or other domestic or foreign suppliers, our business, and in particular product pricing, could be adversely affected. With respect to our Real Estate business, one of our key strategies is to engage in activities that add long term value to our properties, including obtaining entitlements. Many of our competitors in this segment have greater experience in real estate entitlement than we do.

Changes in energy and raw material prices could impact our operating results and financial condition.

Energy and raw material costs, such as oil, natural gas, wood and chemicals, are a significant operating expense, particularly for the Performance Fibers and Wood Products businesses. The prices of raw materials and energy can be volatile and are susceptible to rapid and substantial increases due to factors beyond our control, such as changing economic conditions, political unrest, instability in energy-producing nations, and supply and demand considerations. For example, caustic soda, a key raw material for Performance Fibers, has historically had significant price volatility. Oil and natural gas costs have also substantially increased in recent years and we have experienced, at times, limited availability of hardwood, primarily due to wet weather conditions which impact harvesting and result in increased costs for some Performance Fibers products. Increases in production costs could have a material adverse effect on our business, financial condition and results of operations. In addition, in our Timber, Performance Fibers and Wood Products businesses, the rising cost of fuel, and its impact on the cost and availability of transportation for our products, both domestically and internationally, and the cost and availability of third party logging and trucking services, could have a material adverse effect on our business, financial condition and results of operations.

Changes in global economic conditions, market trends and world events could impact customer demand.

The global reach of our business, particularly the Performance Fibers business and our interest in the New Zealand JV, causes us to be subject to unexpected, uncontrollable and rapidly changing events and circumstances in addition to those experienced in the U.S. The current global economic and financial market situation is an example of such changes. Adverse changes in the following factors, among others, could have a negative impact on our business and results of operations:

 

   

exposure to currencies other than the United States dollar;

 

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regulatory, social, political, labor or economic conditions in a specific country or region; and,

 

   

trade protection laws, policies and measures and other regulatory requirements affecting trade and investment, including loss or modification of exemptions for taxes and tariffs, and import and export licensing requirements.

Our businesses are subject to extensive environmental laws and regulations that may restrict or adversely impact our ability to conduct our business.

Environmental laws and regulations are constantly changing, and are generally becoming more restrictive. Laws, regulations and related judicial decisions, and administrative interpretations affecting our business are subject to change and new laws and regulations that may affect our business are frequently enacted. These changes may adversely affect our ability to harvest and sell timber, operate our manufacturing facilities, remediate contaminated properties and/or entitle real estate. These laws and regulations may relate to, among other things, the protection of timberlands and endangered species, timber harvesting practices, recreation and aesthetics, protection and restoration of natural resources, air and water quality, and remedial standards for contaminated property and groundwater. Over time, the complexity and stringency of these laws and regulations have increased markedly and the enforcement of these laws and regulations has intensified. Moreover, environmental policies of the current administration are in the aggregate more restrictive for industry and landowners than those of the previous administration. For example, in 2010, the U.S. Environmental Protection Agency (“EPA”) pursued a number of initiatives which could, if implemented, impose additional operational and pollution control obligations on industrial facilities like those of Rayonier, especially in the area of air emissions and wastewater and stormwater control. In another example, the EPA recently issued regulations which significantly tighten emissions limits of certain air pollutants from industrial boilers. In addition, as a result of certain 2010 judicial rulings and EPA initiatives, such as the EPA’s recently proposed numeric nutrient regulations affecting Florida’s rivers and streams, silvicultural practices on our timberlands could be impacted in the future. Nonetheless, irrespective of any particular presidential administration, environmental laws and regulations will likely continue to become more restrictive and over time could adversely affect our operating results.

If regulatory and environmental permits are delayed, restricted or rejected, a variety of our operations could be adversely affected. In connection with a variety of operations on our properties, we are required to seek permission from government agencies in the states and countries in which we operate to perform certain activities. Any of these agencies could delay review of, or reject, any of our filings. In our Timber business, any delay associated with a filing could result in a delay or restriction in replanting, thinning, insect control, fire control or harvesting, any of which could have an adverse effect on our operating results. For example, in Washington State, we are required to file a Forest Practice Application for each unit of timberland to be harvested. These applications may be denied, conditioned or restricted by the regulatory agency or appealed by other parties, including citizen groups. Appeals or actions of the regulatory agencies could delay or restrict timber harvest activities pursuant to these permits. Delays or harvest restrictions on a significant number of applications could have an adverse effect on our operating results. In our Performance Fibers and Wood Products businesses, many modifications and capital projects at our manufacturing facilities require one or more environmental permits, or amendments to existing permits. Delays in obtaining these permits could have an adverse effect on our results of operations.

Environmental groups and interested individuals may seek to delay or prevent a variety of operations. We expect that environmental groups and interested individuals will intervene with increasing frequency in the regulatory processes in the states and countries where we own, lease or manage timberlands, and operate mills. For example, in Washington State, environmental groups and interested individuals may appeal individual forest practice applications or file petitions with the Forest Practices Board to challenge the regulations under which forest practices are approved. These and other challenges could materially delay or prevent operations on our properties. Also, interveners at times may bring legal action in Florida in opposition to entitlement and change of use of timberlands to commercial, industrial or residential use. Delays or restrictions due to the intervention of environmental groups or interested individuals could adversely affect our operating results. In addition to intervention in regulatory proceedings, interested groups and individuals may file or threaten to file lawsuits that seek to prevent us from obtaining permits, implementing capital improvements or pursuing operating plans. Any lawsuit or even a threatened lawsuit could delay harvesting on our timberlands, impact how we operate or limit our ability to invest in our mills. Among the remedies that could be enforced in a lawsuit is a judgment preventing or restricting harvesting on a portion of our timberlands, or adversely affecting the timing, projected operating benefits or cost of capital projects at our mills.

 

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The impact of existing regulatory restrictions on future harvesting activities may be significant. Federal, state and local laws and regulations, as well as those of other countries, which are intended to protect threatened and endangered species, as well as waterways and wetlands, limit and may prevent timber harvesting, road building and other activities on our timberlands. The threatened and endangered species restrictions apply to activities that would adversely impact a protected species or significantly degrade its habitat. The size of the area subject to restriction will vary depending on the protected species at issue, the time of year and other factors, but can range from less than one to several thousand acres. A number of species that naturally live on or near our timberlands, including the northern spotted owl, marbled murrelet, bald eagle, several species of salmon and trout in the Northwest, and the red cockaded woodpecker, bald eagle, wood stork, Red Hills salamander and flatwoods salamander in the Southeast, are protected under the Federal Endangered Species Act or similar state laws. Other species, such as the gopher tortoise, are currently under review for possible protection. As we gain additional information regarding the presence of threatened or endangered species on our timberlands, or if other regulations, such as those that require buffers to protect water bodies, become more restrictive, the amount of our timberlands subject to harvest restrictions could increase.

Our Performance Fibers and Wood Products mills are subject to stringent environmental laws and regulations concerning air emissions, wastewater discharge, water usage and waste handling and disposal. Many of our operations are subject to stringent environmental laws, regulations and permits which contain conditions that govern how we operate our facilities and, in many cases, how much product we can produce. These laws, regulations and permits, now and in the future, may restrict our current production and limit our ability to increase production, and impose significant costs on our operations with respect to environmental compliance. It is expected that, overall, costs will likely increase over time as environmental laws, regulations and permit conditions become more stringent, and as the expectations of the communities in which we operate become more demanding.

We currently own or may acquire properties which may require environmental remediation or otherwise be subject to environmental and other liabilities. We currently own, or formerly operated, manufacturing facilities and discontinued operations, or may acquire timberlands and other properties, which are subject to environmental liabilities, such as remediation of soil, sediment and groundwater contamination and other existing or potential liabilities. For more detail, see Note 14 — Liabilities for Dispositions and Discontinued Operations. The cost of investigation and remediation of contaminated properties could increase operating costs and adversely affect financial results. Although we believe we currently have adequate reserves for the investigation and remediation of our properties, legal requirements relating to assessment and remediation of these properties continue to become more stringent and there can be no assurance that actual expenditures will not exceed our expectations, or that other unknown liabilities will not be discovered in the future.

Entitlement and development of real estate entails a lengthy, uncertain and costly approval process.

Entitlement and development of real estate entails extensive approval processes involving multiple regulatory jurisdictions. It is common for a project to require multiple approvals, permits and consents from federal, state and local governing and regulatory bodies. For example, in Florida, real estate projects must generally comply with the provisions of the Local Government Comprehensive Planning and Land Development Regulation Act (the “Growth Management Act”) and local land use and development regulations. In addition, in Florida, development projects that exceed certain specified regulatory thresholds require approval of a comprehensive Development of Regional Impact (“DRI”) application. Compliance with the Growth Management Act, local land development regulations and the DRI process is usually lengthy and costly and significant conditions can be imposed on a developer with respect to a particular project. In addition, development of properties containing delineated wetlands may require one or more permits from the federal government. Any of these issues can materially affect the cost and timing of our real estate projects.

The real estate entitlement process is frequently a political one, which involves uncertainty and often extensive negotiation and concessions in order to secure the necessary approvals and permits. A significant amount of our development property is located in counties in which local governments face challenging issues relating to growth and development, including zoning and future land use, public services, water availability, transportation and other infrastructure and funding for same, and the requirements of state law, especially in the case of Florida under the Growth Management Act and DRI process. In addition, anti-development groups are active, especially in Florida, by filing litigation to oppose particular entitlement activities and development projects, and in seeking legislation and other anti-growth limitations on real estate development activities. We expect that this type of anti-growth activity may continue in the future.

 

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Index to Financial Statements

Issues affecting real estate development also include the availability of potable water for new development projects. For example, in Georgia, the Legislature enacted the Comprehensive Statewide Watershed Management Planning Act, which, among other things, created a governmental entity called the Georgia Water Council which was charged with preparing a comprehensive water management plan for the state and presenting it to the Georgia Legislature. It is unclear at this time how the plan will affect the cost and timing of real estate development along the I-95 coastal corridor in southern Georgia, where the Company has significant real estate holdings. Concerns about the availability of potable water also exists in certain Florida counties, which could impact growth.

Changes in the interpretation or enforcement of these laws, the enactment of new laws regarding the use and development of real estate, changes in the political composition of state and local governmental bodies, and the identification of new facts regarding our properties could lead to new or greater costs and delays and liabilities that could materially adversely affect our business, profitability or financial condition.

Changes in demand for our real estate and delays in the timing of real estate transactions may affect our revenues and operating results.

A number of factors, including changes in demographics, tightening of credit, high unemployment and a slowing of commercial or residential real estate development, particularly along the I-95 coastal corridor in Florida and Georgia, could reduce the demand for our properties and negatively affect our results of operations. The current decline in the housing market in particular, together with the tightening of real state lending standards and availability, certainly had such an effect in 2010 and is expected to continue into 2011.

In addition, there are inherent uncertainties in the timing of real estate transactions that could adversely affect our operating results. Delays in the completion of transactions or the termination of potential transactions can be caused by factors beyond our control. These events have in the past and may in the future adversely affect our operating results.

The impacts of climate-related initiatives, at the international, federal and state levels, remain uncertain at this time.

Currently, there are numerous international, federal and state-level initiatives and proposals addressing domestic and global climate issues. Within the U.S., most of these proposals would regulate and/or tax, in one fashion or another, the production of carbon dioxide and other “greenhouse gases” to facilitate the reduction of carbon compound emissions to the atmosphere, and provide tax and other incentives to produce and use more “clean energy.” In 2011, we believe the potential for climate change legislation at the federal level to be unlikely.

In late 2009, the EPA issued an “endangerment finding” under the Clear Air Act (“CAA”) with respect to certain greenhouse gases, which could lead to the regulation of carbon dioxide as a criteria pollutant under the CAA and have significant ramifications for Rayonier and the industry in general. In this regard, the EPA has published various proposed regulations, which are currently subject to numerous legal challenges, affecting the operation of existing and new industrial facilities that emit carbon dioxide. In addition, as a result of the EPA’s decision to regulate greenhouse gases under the CAA, the states will now have to consider them in permitting new or modified facilities.

On the international front, various efforts, including the United Nations-sponsored Cancun, Mexico conference in December 2010, did not result in a binding agreement to replace the Kyoto Protocol, which expires in 2012.

Overall, it is likely that future legislative and regulatory activity in this area will in some way impact Rayonier, but it is unclear at this time whether such impact will be, in the aggregate, positive or negative, or material. For example, while Rayonier’s Performance Fibers mills produce greenhouses gases and utilize fossil fuels, they also generate a substantial amount of their energy from wood fiber (often referred to as “biomass”), which may be viewed more favorably than fossil fuels in future legislative and regulatory proposals, but that is uncertain at this time. However, environmental groups have generally opposed the use of biomass for energy production due to their concerns about deforestation. Our extensive timber holdings and the biomass they produce may provide opportunities for us to benefit from new legislation and regulation, especially due to the potential benefits available from carbon capture and sequestration opportunities, sale of “carbon credits” and “renewable portfolio standards” that mandate the use of non-fossil fuels by electricity generators, which could lead to increased demand for biomass products from our forests. We continue to monitor political and regulatory developments in this area, but their overall impact on Rayonier, from a cost, benefit and financial performance standpoint, remains uncertain at this time.

 

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Investment returns on pension assets may be lower than expected, requiring us to make significant additional cash contributions to our plans.

We sponsor several defined benefit pension plans, which cover many of our salaried and hourly employees. The Federal Pension Protection Act of 2006 requires that certain capitalization levels be maintained in each of these plans. Because it is unknown what the investment return on pension assets will be in future years, no assurances can be given that future plan contributions required by applicable law will not be material. See Note 19 — Employee Benefit Plans for additional information about these plans, including funded status.

Our joint venture partners may have interests that differ from ours and may take actions that adversely affect us.

We participate in a joint venture in New Zealand, and may enter into other joint venture projects; for example, as part of our real estate strategy. A joint venture involves potential risks such as:

 

   

not having voting control over the joint venture;

 

   

the venture partners at any time may have economic or business interests or goals that are inconsistent with ours;

 

   

the venture partners may take actions contrary to our instructions or requests, or contrary to our policies or objectives with respect to the investment; and,

 

   

the venture partners could experience financial difficulties.

Actions by our venture partners may subject property owned by the joint venture to liabilities greater than those contemplated by the joint venture agreement or to other adverse consequences.

We may be unsuccessful in carrying out our land acquisition strategy.

We have pursued, and intend to continue to pursue, acquisitions of timberland and real estate properties that meet our investment criteria. Our timberland and real estate acquisitions may not perform in accordance with our expectations. We anticipate financing any such acquisitions through cash from operations, borrowings under our credit facilities, the use of equity, proceeds from equity or debt offerings or proceeds from asset dispositions, or any combination thereof. The failure to identify and complete suitable timberland and real estate property acquisitions, and the failure of any acquisitions to perform to our expectations, could adversely affect our operating results.

Our failure to maintain satisfactory labor relations could have a material adverse effect on our business.

Approximately 50 percent of our work force is unionized. These workers are exclusively in our Performance Fibers business. As a result, we are required to negotiate the wages, benefits and other terms with these employees collectively. Our financial results could be adversely affected if labor negotiations were to restrict the efficiency of our operations. In addition, our inability to negotiate acceptable contracts with any of these unions as existing agreements expire could result in strikes or work stoppages by the affected workers. If the unionized employees were to engage in a strike or other work stoppage, or other employees were to become unionized, we could experience a significant disruption of our operations, which could have a material adverse effect on our business, results of operations and financial condition.

Weather and other natural conditions may limit our timber harvest and sales.

Weather conditions, timber growth cycles and restrictions on access may limit harvesting of our timberlands, as may other factors, including damage by fire, insect infestation, disease, prolonged drought and natural disasters such as wind storms and hurricanes.

We do not insure against losses of timber from any causes, including fire.

The volume and value of timber that can be harvested from our timberlands may be reduced by fire, insect infestation, severe weather, disease, natural disasters and other causes beyond our control. A reduction in our timber inventory could adversely affect our financial results and cash flows. As is typical in the forestry industry, we do not maintain insurance for any loss to our timber, including losses due to these causes.

 

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A significant portion of the timberland that we own, lease or manage is concentrated in limited geographic areas.

We own, lease or manage approximately 2.4 million acres of timberland and real estate located primarily in the United States and New Zealand. Over 75 percent of our timberlands are located in four states: Alabama, Florida, Georgia and Washington. Accordingly, if the level of production from these forests substantially declines, or if the demand for timber in those regions declines, it could have a material adverse effect on our overall production levels and our revenues.

We are dependent upon attracting and retaining key personnel.

We believe that our success depends, to a significant extent, upon our ability to attract and retain key senior management and operations management personnel. Our failure to recruit and retain these key personnel could adversely affect our financial condition or results of operations.

Market interest rates may influence the price of our common shares.

One of the factors that may influence the price of our common shares is our annual dividend yield as compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of our common shares.

We have a significant amount of debt and the capacity to incur significant additional debt.

As of December 31, 2010, we had $768 million of debt outstanding. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of OperationsContractual Financial Obligations for the payment schedule of our long-term debt obligations. We expect that existing cash, cash equivalents, marketable securities, cash provided from operations and our bank credit facilities will be sufficient to meet ongoing cash requirements. Moreover, we have the borrowing capacity to incur significant additional debt and may do so if we enter into one or more strategic, merger, acquisition or other corporate or investment opportunities, or otherwise invest capital in one or more of our businesses. However, failure to generate sufficient cash as our debt becomes due, or to renew credit lines prior to their expiration, may adversely affect our business, financial condition, operating results and cash flow.

REIT and Tax-Related Risks

If we fail to remain qualified as a REIT, we will have reduced funds available for distribution to our shareholders because our REIT income will be subject to taxation.

We intend to operate in accordance with REIT requirements pursuant to the Internal Revenue Code of 1986, as amended (the “Code”). For example, as a REIT, we generally will not pay corporate-level tax on income we distribute to our shareholders (other than the income of TRS) as long as we distribute at least 90 percent of our REIT taxable income (determined without regard to the dividends paid deduction) and 95 percent of our net capital gains. Qualification as a REIT involves the application of highly technical and complex provisions of the Code, which are subject to change, perhaps retroactively, and which are not within our control. We cannot assure that we will remain qualified as a REIT or that new legislation, U.S. Treasury regulations, administrative interpretations or court decisions will not significantly affect our ability to remain qualified as a REIT or the federal income tax consequences of such qualification.

If in any taxable year we fail to qualify as a REIT, we will suffer the following negative results:

 

   

we will not be allowed a deduction for dividends paid to shareholders in computing our REIT taxable income; and,

 

   

we will be subject to federal income tax on our REIT taxable income.

In addition, we will be disqualified from treatment as a REIT for the four taxable years following the year during which the qualification was lost, unless we are entitled to relief under certain provisions of the Code. As a result, our net income and the cash available for distribution to our shareholders could be reduced for up to five years or longer.

If we fail to remain qualified as a REIT, we may need to borrow funds or liquidate some investments or assets to pay the additional tax liability. Accordingly, cash available for distribution to our shareholders would be reduced.

 

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The extent of our use of taxable REIT subsidiaries may affect the price of our common shares relative to the share price of other REITs.

We conduct a significant portion of our business activities through one or more taxable REIT subsidiaries. Our use of taxable REIT subsidiaries enables us to engage in non-REIT qualifying business activities such as the production and sale of performance fibers and wood products, real estate entitlement activities and sale of HBU property and other real estate (as a dealer), and sale of logs. Taxable REIT subsidiaries are subject to corporate-level tax. Therefore, we pay income taxes on the income generated by our taxable REIT subsidiaries. Under the Code, no more than 25 percent of the value of the gross assets of a REIT may be comprised of securities of one or more taxable REIT subsidiaries. This limitation may affect our ability to increase the size of our taxable REIT subsidiaries’ operations. Furthermore, our use of taxable REIT subsidiaries may cause the market to value our common shares differently than the shares of other REITs, which may not use taxable REIT subsidiaries as extensively as we use them.

Lack of shareholder ownership and transfer restrictions in our articles of incorporation may affect our ability to qualify as a REIT.

In order to qualify as a REIT, an entity cannot have five or fewer individuals who own, directly or indirectly after applying attribution of ownership rules, 50 percent or more of the value of its outstanding shares during the last six months in each calendar year. Although it is not required by law or the REIT provisions of the Code, almost all REITs have adopted ownership and transfer restrictions in their articles of incorporation or organizational documents which seek to assure compliance with that rule. While we are not in violation of the ownership rules, we do not have, nor do we have any current plans to adopt, share ownership and transfer restrictions. As such, the possibility exists that five or fewer individuals could acquire 50 percent or more of the value of our outstanding shares, which could result in our disqualification as a REIT.

We may be limited in our ability to fund distributions using cash generated through our taxable REIT subsidiaries.

The ability of the REIT to receive dividends from our taxable REIT subsidiaries is limited by provisions of the Code. Specifically, at least 75 percent of gross income for each taxable year as a REIT must be derived from passive real estate sources including sales of our standing timber and other types of qualifying real estate income and no more than 25 percent of our gross income may consist of dividends from our taxable REIT subsidiaries and other non-real estate income.

This limitation on our ability to receive dividends from our taxable REIT subsidiaries may impact our ability to fund cash distributions to our shareholders using cash flows from our taxable REIT subsidiaries. We can, however, under current law, issue stock dividends for up to 90 percent of our regular dividend distribution through 2011. The net income of our taxable REIT subsidiaries is not required to be distributed, and income that is not distributed will not be subject to the REIT income distribution requirement.

Certain of our business activities are potentially subject to prohibited transactions tax.

As a REIT, we will be subject to a 100 percent tax on any net income from “prohibited transactions.” In general, prohibited transactions are sales or other dispositions of property to customers in the ordinary course of business. Sales of performance fibers and wood products which we produce and sales of logs constitute prohibited transactions. In addition, dealer sales of timberlands or other real estate constitute prohibited transactions.

We intend to avoid the 100 percent prohibited transactions tax by conducting activities that would otherwise be prohibited transactions through one or more taxable REIT subsidiaries. We may not, however, always be able to identify timberland properties that will become part of our “dealer” real estate sales business. Therefore, if we sell timberlands which we incorrectly identify as property not held for sale to customers in the ordinary course of business or which subsequently become properties held for sale to customers in the ordinary course of business, we face the potential of being subject to the 100 percent prohibited transactions tax.

 

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Our cash dividends are not guaranteed and may fluctuate.

Generally, REITs are required to distribute 90 percent of their ordinary taxable income, but not their net capital gains income. However, a REIT must pay corporate level tax on its undistributed capital gains. Accordingly, we do not believe that we are required to distribute material amounts of cash since substantially all of our taxable income is treated as capital gains income. Our Board of Directors, in its sole discretion, determines the amount of quarterly dividends to be provided to our shareholders based on consideration of a number of factors. These factors include, but are not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions that may impose limitations on cash payments, future acquisitions and divestitures, harvest levels, changes in the price and demand for our products and general market demand for timberlands, including those timberland properties that have higher and better uses. Consequently, our dividend levels may fluctuate.

Alternative fuel mixture and cellulosic biofuel producer credit(s).

The Company has disclosed information concerning its eligibility for the alternative fuel mixture and cellulosic biofuel producer tax credits. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information. Under applicable law, which expired on December 31, 2009, the tax credits were earned through the burning of qualifying fuels on or before such date. There can be no assurance that the Internal Revenue Service (“IRS”) will not challenge the Company’s eligibility for, and amount of, such tax credits.

 

Item 1B. UNRESOLVED STAFF COMMENTS

None.

 

Item 2. PROPERTIES

The following table details the significant properties we own, lease, or manage by reportable segment (acres in millions):

 

Segment/Operations

  

Location

   Total Acres      Fee-Owned Acres      Long-Term
Leased  Acres
     Managed Acres  

Timber

   Eastern region      1.6         1.3         0.3         —     
  

Western region

     0.4         0.4         —           —     
  

New Zealand(a)

     0.3         —           —           0.3   
                                      
   Total Timber Acres      2.3         1.7         0.3         0.3   

Real Estate

  

U.S.

     0.1         0.1         —           —     
                                      

Total Timberland and Real Estate Acres

     2.4         1.8         0.3         0.3   
                                      

 

       

Capacity/Function

  Owned/Leased

Performance Fibers

 

Jesup, Georgia

 

590,000 metric tons of pulp

  Owned
 

Fernandina Beach, Florida

 

155,000 metric tons of pulp

  Owned
 

Jesup, Georgia

 

Research Facility

  Owned

Wood Products(b)

 

Baxley, Georgia

 

160 million board feet of lumber

  Owned
 

Swainsboro, Georgia

 

125 million board feet of lumber

  Owned
 

Eatonton, Georgia

 

90 million board feet of lumber

  Owned

Wood Chipping Facilities

 

Offerman, Georgia

 

690,000 short green tons of wood chips

  Owned
 

Eastman, Georgia

 

350,000 short green tons of wood chips

  Owned
 

Barnesville, Georgia

 

350,000 short green tons of wood chips

  Owned
 

Jarratt, Virginia

 

250,000 short green tons of wood chips

  Owned

Corporate and Other

 

Jacksonville, Florida

 

Corporate Headquarters

  Leased

 

(a)

Represents acres under Rayonier management, owned by the New Zealand JV. Rayonier owned a 26 percent interest at December 31, 2010.

(b)

These locations also have a combined annual production capacity of approximately 700,000 short green tons of wood chips.

 

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Our manufacturing facilities are maintained through ongoing capital investments, regular maintenance and equipment upgrades. During 2010, our Performance Fibers manufacturing facilities produced at or near capacity levels for most of the year. The Wood Products sawmills produced at a reduced capacity due to decreased demand from a weak housing market.

 

Item 3. LEGAL PROCEEDINGS

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

Discussed below is one of our ongoing environmental proceedings. For further information on our environmental proceedings, see Note 14 — Liabilities for Dispositions and Discontinued Operations.

Financial Assurance Notice of Violation (“NOV”) — In June 2009, the EPA sent SWP an information request under section 3007 of the Resource Conservation and Recovery Act (“RCRA”), pursuant to which it sought information relating to the financial assurance SWP had provided annually from 2004 through 2009 relating to certain of its sites. Financial assurance, which can be in various forms, is required to be submitted annually under applicable RCRA and other regulations for sites requiring remediation and post-closure monitoring under RCRA and other environmental laws, to ensure that adequate financial resources are available to meet a party’s environmental obligations. For the years in question, SWP provided its required financial assurance through a Rayonier corporate guaranty of SWP’s obligations, which is permitted under the applicable regulations. SWP responded to the information request in August 2009, and in February 2010, SWP received an NOV from the EPA relating to this issue. In the NOV, the EPA advised that it believed that SWP’s prior submissions of financial assurance were insufficient and did not meet certain requirements. In November, 2010, the EPA and SWP commenced negotiations to resolve this matter. To date, the EPA has not stated or sought any specific penalty amount. We expect this matter to be resolved in 2011 if a settlement can be reached; otherwise, it may result in a formal enforcement action by the EPA. While there can be no assurances, we do not believe that this matter will have a material adverse effect on the Company’s financial condition.

 

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PART II

 

Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Prices of our Common Shares; Dividends

The table below reflects, for the quarters indicated, the dividends declared per share and the range of market prices of our Common Shares as reported in the consolidated transaction reporting system of the NYSE, the only exchange on which our shares are listed, under the trading symbol RYN.

 

     High      Low      Dividends  

2010

        

Fourth Quarter

   $ 54.52       $ 48.20       $ 0.54   

Third Quarter

   $ 51.29       $ 43.14       $ 0.50   

Second Quarter

   $ 50.72       $ 41.57       $ 0.50   

First Quarter

   $ 46.41       $ 39.70       $ 0.50   

2009

        

Fourth Quarter

   $ 43.92       $ 37.88       $ 0.50   

Third Quarter

   $ 45.00       $ 33.63       $ 0.50   

Second Quarter

   $ 41.79       $ 29.35       $ 0.50   

First Quarter

   $ 32.40       $ 22.28       $ 0.50   

For information about covenants of our credit facility that could restrict our ability to pay cash dividends in the future, see Note 11 — Debt — Debt Covenants.

On February 18, 2011, the Company announced a first quarter dividend of 54 cents per share payable March 31, 2011, to shareholders of record on March 10, 2011. There were approximately 9,334 shareholders of record of our Common Shares on February 11, 2011.

Issuer Repurchases

In 1996, we began a Common Share repurchase program (the “anti-dilutive program”) to minimize the dilutive effect on earnings per share of our employee incentive stock plans. This program limits the number of shares that may be purchased each year to the greater of 1.5 percent of outstanding shares at the beginning of the year or the number of incentive shares issued to employees during the year. In October 2000 and July 2003, our Board of Directors authorized the purchase of additional shares totaling 1.4 million. These shares were authorized separately from the anti-dilutive program, and neither have expiration dates. In 2010, there were no shares repurchased under these plans. As of December 31, 2010, there were 2,483,169 shares available for repurchase.

 

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Stock Performance Graph

The following graph compares the performance of Rayonier’s Common Shares (assuming reinvestment of dividends) with a broad-based market index (Standard & Poor’s (“S&P”) 500), and two industry-specific indices (the S&P 1500 Paper and Forest Products Index and the National Association of Real Estate Investment Trusts (“NAREIT”) Equity REIT Index).

The table and related information shall not be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

LOGO

The data in the following table was used to create the above graph as of December 31:

 

     2005      2006      2007      2008      2009      2010  

Rayonier Inc.

   $ 100       $ 108       $ 130       $ 91       $ 129       $ 168   

S&P 500®

   $ 100       $ 116       $ 122       $ 77       $ 97       $ 112   

S&P© 1500 Paper & Forest Products Index

   $ 100       $ 106       $ 106       $ 43       $ 86       $ 93   

NAREIT Equity REIT

   $ 100       $ 135       $ 114       $ 71       $ 91       $ 116   

 

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Item 6. SELECTED FINANCIAL DATA

The following financial data should be read in conjunction with our Consolidated Financial Statements.

 

     At or For the Years Ended December 31,  
     2010     2009     2008     2007     2006  
     (dollar amounts in millions, except per share data)  

Profitability:

          

Sales

   $ 1,315      $ 1,169      $ 1,271      $ 1,225      $ 1,230   

Operating income(a)

     282        410        226        247        230   

Income from continuing operations(b)

     218        313        149        174        171   

Net income(b)

     218        313        149        174        176   

Diluted earnings per common share:

          

Continuing operations

     2.68        3.91        1.87        2.20        2.19   

Net income

     2.68        3.91        1.87        2.20        2.26   

Financial Condition:

          

Total assets

   $ 2,364      $ 2,253      $ 2,082      $ 2,068      $ 1,965   

Total debt

     768        700        747        721        659   

Shareholders’ equity

     1,252        1,146        939        1,000        918   

Shareholders’ equity — per share

     15.51        14.41        11.91        12.78        11.94   

Cash Flows:

          

Cash provided by operating activities(c)

   $ 495      $ 307      $ 340      $ 324      $ 307   

Capital expenditures

     138        92        105        97        105   

Purchase of timberlands, real estate and other

     5        —          234        27        299   

Depreciation, depletion and amortization

     143        158        168        165        136   

Cash dividends paid

     164        158        157        151        144   

Non-GAAP Financial Measures:

          

EBITDA(d)

          

Timber

   $ 92      $ 77      $ 116      $ 146      $ 152   

Real Estate

     75        80        101        98        91   

Performance Fibers

     272        242        205        209        153   

Wood Products

     5        (6     (2     (2     4   

Other Operations

     1        (3     3        (3     2   

Corporate and other(a)

     (20     178        (28     (36     (28
                                        

Total EBITDA

   $ 425      $ 568      $ 395      $ 412      $ 374   
                                        

Debt to EBITDA

     1.8 to 1        1.2 to 1        1.9 to 1        1.8 to 1        1.8 to 1   

Performance Ratios (%):

          

Operating income to sales

     21        35        18        20        19   

Return on equity(e)

     18        30        15        18        19   

Return on capital(e)

     11        18        9        11        11   

Debt to capital

     38        38        44        42        42   

Other:

          

Timberland and real estate acres — owned, leased, or managed, in millions of acres

     2.4        2.5        2.6        2.5        2.7   

Dividends paid — per share

   $ 2.04      $ 2.00      $ 2.00      $ 1.94      $ 1.88   

 

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Index to Financial Statements
     For the Years Ended December 31,  
     2010      2009      2008      2007      2006  

Selected Operating Data:

              

Timber

              

Timber sales volume

              

Western U.S. — in millions of board feet

     164         166         232         254         274   

Eastern U.S. — in thousands of short green tons

     4,980         6,401         6,824         6,168         4,740   

Real Estate — acres sold

              

Development

     472         789         501         4,356         9,377   

Rural

     15,868         15,628         15,845         12,817         16,874   

Non-Strategic Timberlands

     44,556         53,703         49,801         —           —     
                                            

Total Acres Sold

     60,896         70,120         66,147         17,173         26,251   
                                            

Performance Fibers

              

Sales volume (thousands of metric tons)

              

Cellulose specialties

     480         464         471         467         474   

Absorbent materials

     238         270         253         259         272   
                                            

Total

     718         734         724         726         746   
                                            

Wood Products

              

Lumber sales volume — in millions of board feet

     243         224         321         329         350   

 

(a)

The 2010 results include a gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand JV. The 2009 results include income of $205 million related to the AFMC. The 2007 results include an $11 million loss from wildfires on timberlands in southeast Georgia and northeast Florida.

(b)

The 2010 results include a tax benefit of $24 million for the CBPC and a gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand JV. The 2009 results include income of $193 million related to the AFMC.

(c)

The 2010 results include a cash refund from the IRS of $189 million related to the AFMC.

(d)

EBITDA is defined as earnings before interest, taxes, depreciation, depletion and amortization. EBITDA is a non-GAAP valuation measure used by our Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how the Company is performing relative to the assets under management. We reconcile EBITDA to Net Income for the Consolidated Company and Operating Income for the Segments, as those are the nearest GAAP measure for each. See the following page for a reconciliation of Operating Income to EBITDA in total and by segment. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Performance and Liquidity Indicators for a reconciliation of Net Income to EBITDA.

(e)

Return on equity is calculated by dividing income from continuing operations by the average of the opening (1/1/XX) and ending (12/31/XX) shareholders’ equity for each period presented. Return on capital is calculated by dividing income from continuing operations by the sum of average shareholders’ equity and average outstanding debt.

 

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Index to Financial Statements

Reconciliation of Operating Income (Loss) by Segment to EBITDA by Segment

(dollars in millions)

 

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

2010

                   

Operating income(a)

   $ 33       $ 53       $ 214       $ 2      $ 1      $ (21   $ 282   

Add:

 

 Depreciation, depletion and amortization

     59         22         58         3        —          1        143   
                                                             

EBITDA(a)

   $ 92       $ 75       $ 272       $ 5      $ 1      $ (20   $ 425   
                                                             

2009

                   

Operating income (loss)(b)

   $ 7       $ 56       $ 184       $ (11   $ (3   $ 177      $ 410   

Add:

 

 Depreciation, depletion and amortization

     70         24         58         5        —          1        158   
                                                             
 

EBITDA(b)

   $ 77       $ 80       $ 242       $ (6   $ (3   $ 178      $ 568   
                                                             

2008

                   

Operating income (loss)

   $ 31       $ 80       $ 149       $ (7   $ 3      $ (30   $ 226   

Add:

 

 Depreciation, depletion and amortization

     85         21         56         5        —          2        169   
                                                             

EBITDA

     $ 116       $ 101       $ 205       $ (2   $ 3      $ (28   $ 395   
                                                             

2007

                   

Operating income (loss)

   $ 60       $ 93       $ 141       $ (8   $ (3   $ (36   $ 247   

Add:

 

 Depreciation, depletion and amortization

     86         5         68         6        —          —          165   
                                                             

EBITDA

     $ 146       $ 98       $ 209       $ (2   $ (3   $ (36   $ 412   
                                                             

2006

                   

Operating income (loss)

   $ 99       $ 89       $ 80       $ (3   $ 1      $ (36   $ 230   

Add:

 

 Depreciation, depletion and amortization

     53         2         73         7        1        —          136   

Add:

 

 Discontinued operations

     —           —           —           —          —          9        9   

Less:

 

 Non-operating expense

     —           —           —           —          —          (1     (1
                                                             

EBITDA

     $ 152       $ 91       $ 153       $ 4      $ 2      $ (28   $ 374   
                                                             

 

(a)

Corporate and other includes a gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand JV. See Note 6 — Joint Venture Investment for additional information.

(b)

Corporate and other includes $205 million related to the AFMC. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

 

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Index to Financial Statements
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

Our revenues, operating income and cash flows are primarily derived from three core business segments: Timber, Real Estate and Performance Fibers. We own or lease (under long-term agreements) approximately 2.1 million acres of timberland and real estate in Alabama, Arkansas, Florida, Georgia, Louisiana, New York, Oklahoma, Texas and Washington. We believe we are the seventh largest private landowner in the United States. Our Real Estate business seeks to maximize the value of our properties which are more valuable for development, recreational or conservation uses than for growing timber, and sell our non-strategic timberland. Our Performance Fibers business has been a supplier of premier cellulose specialty grades of pulp for over eighty years.

We have consistently generated strong cash flows and operating results by focusing on the following critical financial measures: segment operating income and EBITDA, cash available for distribution in total and on a per-share basis, debt to EBITDA ratio, debt to capital ratio, return on equity, return on fair market value (Timber and Real Estate) and return on capital employed (Performance Fibers). Key non-financial measures include safety and environmental performance, quality, production as a percent of capacity and various yield statistics.

Our focus is on cash generation, effective allocation of capital and maximizing returns for shareholders. Our strategy consists of the following key elements:

 

   

Increase the size and quality of our timberland holdings through cash-accretive timberland acquisitions while selling timberland that no longer meets our strategic or financial return requirements. This strategy, which requires a disciplined approach and rigorous adherence to strategic and financial metrics, can result in significant year-to-year variation in timberland acquisitions and divestitures. For example, we acquired 110,000 acres of timberland in 2008, none in 2009 and 3,000 acres in 2010. We sold approximately 45,000 and 54,000 acres of non-strategic timberland in 2010 and 2009, respectively.

 

   

Extract maximum value from our HBU properties. We will continue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses. During 2010 we entitled 1,800 acres in Florida and 3,000 acres in Georgia. We are actively working to entitle another 32,000 acres in Florida.

 

   

Differentiate our Performance Fibers business by developing and improving customer specific applications. We will emphasize operational excellence to ensure quality, reliability and efficiency. We are also evaluating the conversion of our absorbent material production line at the Jesup, Georgia mill to produce cellulose specialties.

We continuously evaluate our capital structure. Our year-end debt-to-capital ratio was 38 percent and our debt-to-EBITDA ratio was 1.8 times. We believe that a debt-to-EBITDA ratio of up to three times is appropriate to keep our weighted-average cost of capital low while maintaining an investment grade debt rating as well as retaining the flexibility to actively pursue growth opportunities.

We have historically had conservative leverage and believe in keeping ample liquidity and flexibility. Maintaining an investment grade debt rating has been a key element of this overall financial strategy as it historically allowed access to corporate debt markets even in difficult economic conditions. We have $245 million of available borrowing capacity on our revolving credit facility as of December 31, 2010. We expect to renegotiate this facility in the second quarter of 2011, ahead of its August 2011 expiration.

In 2009 we qualified for a tax credit, the AFMC, based on the use of alternative fuels in our Performance Fibers mills. This tax credit totaled $215 million and expired on December 31, 2009. We applied about $22 million of the credit against 2009 tax payments and another $4 million against 2010 estimated tax payments. The remaining $189 million was refunded in mid-2010 after the filing of our 2009 tax return, providing significant additional liquidity. In 2010, we determined that we qualified for another alternative fuel based credit, the CBPC, after an IRS ruling. The CBPC benefit totals about $24 million and will be realized in 2011 through refunds of prior year taxes and reductions in 2011 tax payments. We expect to use the remaining cash for strategic growth opportunities, capital expenditures in our Performance Fibers mills and for the conversion of the absorbent materials production line as noted above, if that project proceeds.

 

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Index to Financial Statements

We maintain four qualified defined benefit plans and one unfunded plan to provide benefits in excess of amounts allowable under current tax law. We contributed $50 million to our qualified pension plans in 2010. This contribution along with a 15 percent return on pension assets resulted in an improvement in our funded status. At December 31, 2010, our qualified plans were underfunded $18 million versus $65 million at December 31, 2009. Our unfunded plans’ liabilities decreased from $28 million at December 31, 2009 to $26 million at December 31, 2010. We are not required to make any pension contributions in 2011 and do not expect to make any discretionary contributions.

Our strategic capital is expected to be allocated primarily to our Timber segment, with the remainder in Performance Fibers and Real Estate. We have a $93 million note payable which matures at December 31, 2011. We expect to repay this note using cash on hand. However, we may refinance this debt and possibly incur additional debt in connection with strategic growth opportunities.

In 2010, our annual dividend was $2.04 per share, reflecting a fourth quarter increase in the quarterly dividend to $0.54 per share. Our 2011 dividend payments are expected to total $175 million assuming no change in the current rate.

Overall, we believe we have adequate liquidity and sources of capital to run our businesses efficiently and effectively and to maximize the value of assets under management. We expect cash flow from operations to adequately cover planned capital expenditures, interest expense and dividends in 2011.

Operational Strategies

Timber is sold primarily through an auction process, although it is also marketed through log supply agreements, particularly in the Western region. We operate Timber as a stand-alone business, requiring our mills to compete with third-party bidders for timber, primarily at auction. This promotes realizing market value, generating a true measure of fair value returns in Timber and minimizing the possibility of our manufacturing facilities being subsidized with below market-cost wood. We focus on optimizing Timber returns by continually improving productivity and yields through advanced silvicultural practices which take into account soil, climate and biological considerations. We also actively pursue other non-timber sources of income, primarily hunting and other recreational licenses. Finally, we evaluate timberland acquisitions and pursue those that meet various financial and strategic criteria.

A significant portion of our acreage is more valuable for development, recreational or conservation purposes than for growing timber. To maximize the value of our development properties, our strategy is to engage in value-added entitlement activities versus selling real estate in bulk without entitlements. We continue to seek entitlements for holdings in the Southeast and currently have approximately 7,900 acres of entitled land in Georgia and 1,800 acres of entitled land in Florida. Additionally, in 2010 we continued our strategy of selling non-strategic timberland holdings that do not meet our investment criteria, which enables us to redeploy capital to higher return assets.

In Performance Fibers, the focus has been to improve our position as a premier supplier of cellulose specialties, which comprised 67 percent of our 2010 sales volume; the remainder of our volume is in absorbent materials consisting primarily of fluff pulp. We are a market leader in cellulose specialties, utilizing our considerable technical applications expertise to customize products to exacting specifications, which allows differentiation from most competitors. Fluff pulp is a semi-commodity with limited opportunity for differentiation other than by price and customer service. There are a number of much larger companies in the fluff pulp market and we are not a market leader.

Cost control is a critical element to remaining competitive in the Performance Fibers markets. The keys to success are operating continuously, safely, and efficiently while closely managing raw material and conversion costs. Capital expenditures typically are directed toward cost reduction, product enhancements, environmental requirements and efficiency projects. Historically, we have used a significant amount of fossil fuels to operate our mills. To reduce variability and cost, we completed a number of capital projects to reduce fossil fuel consumption, including a power boiler replacement at our Fernandina Beach, Florida facility, which primarily consumes wood waste.

Our capital expenditures totaled $138 million in 2010. For 2011, capital expenditures (excluding strategic acquisitions and the potential absorbent material production line conversion) are expected to range from $140 million to $145 million. The majority of this increase is planned for silvicultural investments in our timberlands. In Performance Fibers, we expect to again undertake significant cost reduction and efficiency projects.

 

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Index to Financial Statements

Industry and Market Conditions

Timber and lumber markets rebounded in 2010, benefiting from weather-related supply constraints, particularly early in the year. Additionally, there was increasing export demand on the west coast for logs and lumber, driven primarily by China. However, domestic demand for saw timber remained weak due to the anemic housing market. Demand for pulpwood remained relatively stable. We maintained our timber harvest levels on our Washington property at prior year levels. We continued to harvest primarily pulpwood on our southeastern holdings, although volumes declined reflecting a return to more normal thinning levels. In 2011, we expect Timber results to exceed 2010 reflecting higher prices and increased volumes from our Washington property.

In Real Estate, our sales mix was consistent with prior year as demand for non-strategic timberlands and rural property held steady, while demand for development property remained soft due to the weak housing market and overall economic decline. We expect similar conditions in the near term, but also expect non-strategic timberland sales to be only one third of 2010 volume as we wind down that program.

In Performance Fibers, acetate and ethers market demand remains strong. Sales are typically made under one to five year contracts, which establish prices and target volumes at the beginning of the year and buffer some of the changes in supply and demand typically seen in worldwide commodity pulp and paper markets. We have long-term contracts with the world’s largest manufacturers of acetate-based products and other key customers that extend into 2013 and 2014 and represent a significant majority of our high value cellulose specialties production. Our recognized technical and market leadership has allowed us to maintain strong pricing across our cellulose specialties product lines. In 2009, a small amount of new capacity from competitors in the Southern hemisphere came on-line. This new volume did not affect our 2010 results. Another mill which had been shut down for four years has changed ownership with the announced intention of producing cellulose specialties. We do not expect this new capacity to adversely impact our results in 2011; however, it is unclear how these market dynamics may impact our business in 2012 and beyond.

Absorbent materials prices increased in 2010 reflecting economic growth in Asia. Our prices are expected to decline in 2011 from 2010 levels. Sales of absorbent materials are typically made with an annual volume agreement that allows price to move with the market during the year.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and to disclose contingent assets and liabilities in our Annual Report on Form 10-K. 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.

Merchantable inventory and depletion costs as determined by forestry timber harvest models

Significant assumptions and estimates are used in the recording of timberland inventory cost and depletion. Merchantable standing timber inventory is estimated by our forestry technical services group annually, using industry-standard computer software. The inventory calculation takes into account growth, in-growth (annual transfer of oldest pre-merchantable age class into merchantable inventory), timberland sales and the annual harvest specific to each business unit. The age at which timber is considered merchantable is reviewed periodically and updated for changing harvest practices, future harvest age profiles and biological growth factors.

An annual depletion rate is established for each particular region by dividing merchantable inventory book cost by standing merchantable inventory. Pre-merchantable records are maintained for each planted year age class, recording acres planted, stems per acre and costs of planting and tending. Changes in the assumptions and/or estimations used in these calculations may affect our timber inventory and depletion costs. Factors that can impact timber volume include weather changes, losses due to natural causes, differences in actual versus estimated growth rates and changes in the age when timber is considered merchantable. A three percent company-wide change in estimated standing merchantable inventory would cause 2010 depletion expense to change by approximately $2 million.

An acquisition of timberlands can also affect the depletion rate. Upon the acquisition of timberland, we make a determination on whether to combine the newly acquired merchantable timber with an existing depletion pool or to create a new separate pool. The determination is based on the geographic location of the new timber, the customers/markets that will be served and species mix.

 

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Index to Financial Statements

Depreciation and impairment of long-lived assets

Depreciation expense is computed using the units-of-production method for the Performance Fibers plant and equipment and the straight-line method on all other property, plant and equipment over the useful economic lives of the assets involved. We believe that these depreciation methods are the most appropriate under the circumstances as they most closely match revenues with expenses versus other generally accepted accounting methods. Long-lived assets are periodically reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Cash flows used in such impairment analyses are based on long-range plan projections, which take into account recent sales and cost data as well as macroeconomic drivers such as customer demand and industry capacity. The physical life of equipment, however, may be shortened by economic obsolescence caused by environmental regulation, competition or other causes.

Beginning in the fourth quarter of 2008, our Wood Products sawmills curtailed production due to weak market conditions. In 2011, we expect to continue to operate at reduced production levels unless market conditions improve. Based on long range plan projections, we estimate that our carrying amount is recoverable through future operations.

Environmental costs associated with dispositions and discontinued operations

At December 31, 2010, we had $93 million of accrued liabilities for environmental costs relating to past dispositions and discontinued operations. Numerous cost assumptions are used in estimating these obligations. Factors affecting these estimates include significant changes in contamination, discharge or treatment volumes, requirements to perform additional or different remediation, changes in environmental remediation technology, additional findings of contaminated soil, groundwater or sediment off-site, remedy selection, changes in law or interpretation of existing law and the outcome of negotiations with governmental agencies. We periodically review our environmental liabilities and also engage third-party consultants to assess our ongoing remediation of contaminated sites. A significant change in any of the estimates could have a material effect on the results of our operations. Typically, these cost estimates do not vary significantly on a quarter to quarter basis. In 2010 and 2009, we increased the liability by $3 million and $2 million, respectively. See Note 14 — Liabilities for Dispositions and Discontinued Operations for additional information.

Determining the adequacy of pension and other postretirement benefit assets and liabilities

We have four qualified benefit plans which cover most of our U.S. workforce and an unfunded plan to provide benefits in excess of amounts allowable under current tax law to certain participants in the qualified plans. Three of these plans are closed to new participants and the fourth plan will be closed to new participants effective March 1, 2011. Pension expense for all plans was $10 million in 2010. Numerous estimates and assumptions are required to determine the proper amount of pension and postretirement liabilities and annual expense to record in our financial statements. The key assumptions include discount rate, return on assets, salary increases, health care cost trends, mortality rates, longevity and service lives of employees. Although there is authoritative guidance on how to select most of these assumptions, we exercise some degree of judgment when selecting these assumptions based on input from our actuary. Different assumptions, as well as actual versus expected results, would change the periodic benefit cost and funded status of the benefit plans recognized in the financial statements.

In determining pension expense in 2010, a $22 million return was assumed based on an expected long-term rate of return of 8.5 percent. The actual return for 2010 was a gain of $36 million, or 15 percent. Our long-term return assumption was established based on historical long-term rates of return on broad equity and bond indices, discussions with our actuary and investment advisors and consideration of the actual annualized rate of return from 1994 (the date of our spin-off from ITT Corporation) through 2010. At the end of 2010, we reviewed this assumption for reasonableness and determined that the 2010 long-term rate of return assumption should remain at 8.5 percent. At December 31, 2010, our asset mix consisted of 67 percent equities, 30 percent bonds and 3 percent real estate. We do not expect this mix to change materially in the near future.

The Company’s pension plans were underfunded by $44 million at December 31, 2010, a $49 million improvement in funding status from December 31, 2009 due primarily to employer contributions and favorable asset returns. In 2010, we made discretionary pension contributions of $50 million, compared to contributions of $10 million in 2009, of which $8 million was mandatory. We made discretionary contributions of $8 million in 2008. Future requirements will vary depending on actual investment performance, changes in valuation assumptions, interest rates, requirements under the Pension Protection Act and other employee related matters. See Note 19 — Employee Benefit Plans for additional information.

 

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Index to Financial Statements

In determining future pension obligations, we select a discount rate based on information supplied by our actuary. The actuarial rates are developed by models which incorporate high quality (AAA and AA rated), long-term corporate bond rates into their calculations. The discount rate was 5.25 percent and 5.80 percent at December 31, 2010 and 2009, respectively. Future pension expense will be impacted by many factors including actual investment performance, changes in discount rates, timing of contributions and other employee related matters.

The sensitivity of pension expense and projected benefit obligation to changes in economic assumptions is highlighted below:

 

     Impact on:  

Change in Assumption

       Pension Expense                 Projected  Benefit
Obligation
 

25 bp decrease in discount rate

     +1.0 million            +11.0 million   

25 bp increase in discount rate

     -1.0 million            -10.5 million   

25 bp decrease in long-term return on assets

     +0.6 million         

25 bp increase in long-term return on assets

     -0.6 million         

Realizability of both recorded and unrecorded tax assets and liabilities

As a REIT, our Timber operations are generally not subject to income taxation. Our income taxes can vary significantly based on the mix of income between our REIT and TRS businesses, thereby impacting our effective tax rate and the amount of taxes paid during fiscal periods. Also, our projection of estimated income tax for the year and our provision for quarterly income taxes, in accordance with generally accepted accounting principles, may have significant variability. Similarly, the assessment of the ability to realize certain deferred tax assets, or estimate deferred tax liabilities, may be subjective.

We have recorded certain deferred tax assets that we believe will be realized in future periods. These assets are reviewed periodically in order to assess their realizability. This review requires us to make assumptions and estimates about future profitability affecting the realization of these tax benefits. If the review indicates that the realizability may be less than likely, a valuation allowance is recorded at that time.

Our income tax returns are subject to examination by U.S. federal, state, and foreign taxing authorities. In evaluating the tax benefits associated with various tax filing positions, we record a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. We record a liability for an uncertain tax position that does not meet this criterion. The liabilities for unrecognized tax benefits are adjusted in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information becomes available. See Note 8 — Income Taxes for additional information on our unrecognized tax benefits.

 

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Index to Financial Statements

Summary of our results of operations for the three years ended December 31:

 

Financial Information (in millions)

   2010     2009     2008  

Sales

      

Timber

      

Eastern

   $ 102      $ 104      $ 112   

Western

     66        47        78   

New Zealand

     9        8        9   
                        

Total Timber

     177        159        199   

Real Estate

      

Development

     3        3        5   

Rural

     28        32        48   

Non-Strategic Timberlands

     65        66        74   
                        

Total Real Estate

     96        101        127   

Performance Fibers

      

Cellulose specialties

     686        658        600   

Absorbent materials

     195        181        198   
                        

Total Performance Fibers

     881        839        798   

Wood Products

     68        51        86   

Other Operations

     102        38        61   

Intersegment Eliminations

     (9     (19     —     
                        

Total Sales

   $ 1,315      $ 1,169      $ 1,271   
                        

Operating Income (Loss)

      

Timber

   $ 33      $ 7      $ 31   

Real Estate

     53        56        80   

Performance Fibers

     214        184        149   

Wood Products

     2        (11     (7

Other Operations

     1        (3     3   

Corporate and other(a)

     (21     177        (30
                        

Operating Income

     282        410        226   

Interest Expense

     (50     (53     (50

Interest/Other Income

     1        2        2   

Income Tax Expense(b)

     (15     (46     (29
                        

Net Income

   $ 218      $ 313      $ 149   
                        

 

(a)

The 2010 results include a gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand JV. See Note 6 — Joint Venture Investment for additional information. The 2009 results include income of $205 million related to the AFMC. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

(b) The 2010 results include a tax benefit of $24 million for the CBPC. The 2009 results include a tax expense of $12 million related to the AFMC.

 

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Results of Operations, 2010 versus 2009

Timber

 

Sales (in millions)

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

Eastern

   $ 104       $ 14       $ (16   $ 102   

Western

     47         18         1        66   

New Zealand

     8         —           1        9   
                                  

Total Sales

   $ 159       $ 32       $ (14   $ 177   
                                  

 

Operating Income/(Loss) (in millions)

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

Eastern

   $ 17      $ 14       $ (5   $ —        $ 26   

Western

     (7     18         (1     (3     7   

New Zealand/Other

     (3     —           —          3        —     
                                         

Total Operating Income

   $ 7      $ 32       $ (6   $ —        $ 33   
                                         

In the Eastern region, 2010 sales declined from the prior year as higher prices mainly due to weather-related supply constraints were more than offset by lower volumes as thinnings returned to more normalized levels. Average prices rose $4.10 per short green ton, or 25 percent, for the year, while volumes declined 22 percent. Operating income improved from 2009 due to higher margins.

In the Western region, sales and operating income improved from prior year periods primarily due to higher prices driven largely by stronger export demand. The 41 percent average price improvement was somewhat offset by a one percent decline in volumes as well as increased costs, mainly for road maintenance.

In February 2010, our New Zealand JV, Matariki Forestry Group (“Matariki”), sold a 35 percent interest in the JV to a new investor for NZ$167 million. The investment was for newly issued capital by Matariki which was used entirely to pay down a portion of the outstanding NZ$367 million debt. The transaction reduced our ownership interest in Matariki from 40 percent to 26 percent. Rayonier continues to manage the JV. The New Zealand sales represent timberland management fees for services provided to the JV. The operating income primarily represents equity earnings related to the JV’s timber activities which have increased from 2009 mainly due to improved export demand.

Real Estate

Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: HBU development, HBU rural and non-strategic timberlands. Our strategy is to extract maximum value from our HBU properties. We pursue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses.

 

      2009      Changes Attributable to:     2010  

Sales (in millions)

      Price     Volume/
Mix
   

Development

   $ 3       $ —        $ —        $ 3   

Rural

     32         (4     —          28   

Non-Strategic Timberlands

     66         10        (11     65   
                                 

Total Sales

   $ 101       $ 6      $ (11   $ 96   
                                 

 

Operating Income (in millions)

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

Total Operating Income

   $ 56       $ 6       $ (7   $ (2   $ 53   
                                          

 

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Full year sales and operating income were $5 million and $3 million below the prior year, respectively, primarily due to a 14 percent decline in rural prices reflecting a change in geographic mix. A 17 percent decline in non-strategic timberland acres sold due to timing of sales was mostly offset by an increase of $215 per acre, or17 percent, due to location and site characteristics.

Performance Fibers

 

Sales (in millions)

   2009      Changes Attributable to:     2010  
      Price      Volume/
Mix
   

Cellulose specialties

   $ 658       $ 4       $ 24      $ 686   

Absorbent materials

     181         36         (22     195   
                                  

Total Sales

   $ 839       $ 40       $ 2      $ 881   
                                  

Cellulose specialties sales improved as prices increased $8 per ton, and volumes increased 4 percent from the prior year period reflecting strong demand. The 2010 price increase was mostly offset by the removal of a 2009 cost-based surcharge.

Absorbent materials sales increased as prices rose $153 per ton, or 24 percent, mainly due to tight supply. Sales volumes declined by 12 percent due to the timing of customer orders, a shift in production to cellulose specialties and production issues.

 

Operating Income (in millions)

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

Total Operating Income

   $ 184       $ 40       $ 5       $ (15   $ 214   
                                           

In 2010, operating income improved from 2009 primarily due to higher absorbent materials and cellulose specialties prices as well as an increase in cellulose specialties volumes. Full year costs were above 2009 mainly due to an increase in wood, chemical and transportation costs.

Wood Products

 

Sales (in millions)

   2009      Changes Attributable to:      2010  
      Price      Volume     

Total Sales

   $ 51       $ 13       $ 4       $ 68   
                                   

 

Operating (Loss) Income (in millions)

   2009     Changes Attributable to:      2010  
     Price      Costs     

Total Operating (Loss) Income

   $ (11   $ 13       $ —         $ 2   
                                  

Although below historical averages, sales and operating income improved from the prior year as prices and volumes rose 23 percent and 9 percent, respectively. Prices increased in the first half of the year due to supply constraints caused by wet weather, and remained above 2009 for the second half of 2010 as demand increased. Our sawmills continued to produce at a reduced capacity due to a weak housing market.

Other Operations

Sales and operating results improved from the prior year primarily due to higher export demand in both our northwest U.S. and New Zealand log trading businesses and lower foreign exchange losses in 2010.

 

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Corporate and Other Expense/Eliminations

The 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 JV. See Note 6 — Joint Venture Investment for additional information. The 2009 results include $205 million relating to the AFMC. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information. Excluding these special items, corporate and other expenses were $33 million for 2010, compared to $28 million for the prior year. The 2010 results include a $3 million accrual for increased future environmental costs associated with closed facilities as well as higher incentive compensation accruals.

Intersegment eliminations decreased from 2009 primarily due to lower sales from our Timber segment to our Performance Fibers segment.

Interest Expense and Interest/Other Income

Interest expense declined from 2009 due to lower average interest rates and a decline in average debt balances. Interest/Other Income decreased from the prior year as 2009 included a $1 million favorable IRS interest claim.

Income Tax Expense

The full year effective tax rate was 6.5 percent compared to 12.9 percent in 2009. The significant decline in 2010 reflects the benefit of a $24 million CBPC. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

Excluding discrete items the effective tax rate was 18.5 percent, down from 21.6 percent in 2009. The lower rate in 2010 was due to proportionately higher earnings from the REIT.

See Note 8 — Income Taxes for additional information regarding the provision for income taxes and the rate reconciliation which lists discrete items.

Outlook for 2011

We are encouraged by the improvement in our key markets. For 2011, we expect Timber results to improve somewhat, reflecting continued export demand for sawlogs from our Washington property and strong pulpwood demand in the Southeast. We anticipate greater buyer interest in our rural and conservation properties, although substantially lower non-strategic land sales will likely reduce the total contribution from Real Estate. In Performance Fibers, strong demand for cellulose specialties is driving significant price increases and our expectation of another record year, as we continue to run at full capacity to meet our customers’ needs.

Overall, we anticipate EPS of $2.50 to $2.70 per share. We expect cash available for distribution (“CAD”) to range between $260 million and $280 million, well above our dividend level. With strong operating cash flows, low leverage and ample liquidity, we will continue to grow our businesses and effectively allocate our strategic capital.

Results of Operations, 2009 versus 2008

Timber

 

Sales (in millions)

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

Eastern

   $ 112       $ (20   $ 12      $ 104   

Western

     78         (12     (19     47   

New Zealand

     9         —          (1     8   
                                 

Total Sales

   $ 199       $ (32   $ (8   $ 159   
                                 

 

Operating Income/(Loss) (in millions)

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

Eastern

   $ 21      $ (20   $ (5   $ 21      $ 17   

Western

     12        (12     (7     —          (7

New Zealand/Other

     (2     —          —          (1     (3
                                        

Total Operating Income

   $ 31      $ (32   $ (12   $ 20      $ 7   
                                        

 

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In the Eastern region, sales and operating income decreased due to weaker sawlog markets and a sales mix shift from sawtimber to lower-priced pulpwood, which continued to have solid demand. The impact of the 18 percent decline in pine stumpage prices and six percent decline in overall volumes was partially offset by lower depletion and logging costs as well as an increase in other income such as recreational licenses.

In the Western region, sales and operating income decreased as weak demand and planned harvest reductions negatively impacted prices and volumes. Delivered sawlog prices and overall volumes declined 21 percent and 29 percent from the prior year, respectively. While logging costs improved in the Western region, the benefit was mostly offset by higher depletion expense related to a second quarter 2008 timberland acquisition.

Real Estate

 

Sales (in millions)

   2008      Changes Attributable to:      2009  
      Price     Volume/
Mix
    

Development

   $ 5       $ (5   $ 3       $ 3   

Rural

     48         (16     —           32   

Non-Strategic Timberlands

     74         (13     5         66   
                                  

Total Sales

   $ 127       $ (34   $ 8       $ 101   
                                  

 

Operating Income (in millions)

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

Total Operating Income

   $ 80       $ (34   $ 9       $ 1       $ 56   
                                           

Sales and operating income declined from the prior year due to lower per acre prices primarily driven by soft markets and geographic mix. Average rural prices declined $997 per acre, or 33 percent, from the prior year while average non-strategic timberlands prices declined $247 per acre, or 17 percent, from their 2008 peak. Non-strategic timberland sales volumes rose eight percent.

Performance Fibers

 

Sales (in millions)

   2008      Changes Attributable to:     2009  
      Price     Volume/
Mix
   

Cellulose specialties

   $ 600       $ 68      $ (10   $ 658   

Absorbent materials

     198         (28     11        181   
                                 

Total Sales

   $ 798       $ 40      $ 1      $ 839   
                                 

Sales increased five percent from 2008 largely due to higher cellulose specialties prices which, on average, rose $147 per ton, or 12 percent, reflecting strong market demand and a cost-related surcharge that was in effect for the first six months of the year. Cellulose specialties volume declined two percent from the prior year primarily due to the timing of customer orders and lower production volumes.

Average prices in absorbent materials decreased $104 per ton, or 14 percent, from the prior year due to weaker markets while volumes increased due to improved production as the 2008 results were impacted by unplanned maintenance outages.

 

Operating Income (in millions)

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

Total Operating Income

   $ 149       $ 40       $ (2   $ (3   $ 184   
                                          

In 2009, operating income improved from 2008 as higher sales prices more than offset higher production costs and the impact of sales mix shift.

 

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Wood Products

 

Sales (in millions)

   2008      Changes Attributable to:     2009  
      Price     Volume    

Total Sales

   $ 86       $ (9   $ (26   $ 51   
                                 

 

Operating Loss (in millions)

   2008     Changes Attributable to:      2009  
     Price     Costs     

Total Operating Loss

   $ (7   $ (9   $ 5       $ (11
                                 

Sales declined and operating loss increased from the prior year due to the weak housing market and increased production curtailments, offset partially by lower wood costs. Prices and volumes declined 16 percent and 30 percent from the prior year, respectively.

Other Operations

Sales decreased $23 million from 2008 primarily reflecting lower trading. Operating income declined $6 million as foreign exchange losses were recorded in 2009 while foreign exchange gains were recognized in 2008.

Corporate and Other Expense/Eliminations

Corporate and Other Expense includes $205 million for earnings related to the AFMC. Excluding the impact of the AFMC, corporate and other expenses were $28 million in 2009, a $2 million decline from 2008 as an insurance recovery more than offset higher stock-based and other incentive compensation.

Intersegment eliminations increased from 2008 primarily reflecting higher sales from our Timber segment to our Performance Fibers segment.

Interest and Other Income/Expense

Interest and other income/expense in 2009 was $3 million above the prior year as higher average debt balances more than offset lower interest rates. In August 2009, we issued $172.5 million of 4.50% Senior Exchangeable Notes due in 2015, with approximately $138 million of the proceeds used to retire debt, including $122 million of 8.39% installment notes that matured in December 2009.

Income Tax Expense

Our 2009 effective tax rate including discrete items was 12.9 percent compared to 16.5 percent in 2008. Before discrete items, our effective tax rate increased to 21.6 percent from 15.0 percent in 2008 due to proportionately higher earnings from the TRS.

See Note 8 — Income Taxes for additional information regarding the provision for income taxes.

Liquidity and Capital Resources

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.

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

 

     As of December 31,  
     2010     2009     2008  

Cash and cash equivalents

   $ 349      $ 75      $ 62   

Total debt

     768        700        747   

Shareholders’ equity

     1,252        1,146        939   

Total capitalization (total debt plus equity)

     2,020        1,846        1,686   

Debt to capital ratio

     38     38     44

 

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Our 2010 debt-to-capital ratio was consistent with 2009, as higher debt from $75 million in borrowings was offset by higher equity, mainly driven by earnings. See Note 11 — Debt for further information on the $75 million borrowing.

Our debt-to-capital ratio decreased from 2009 to 2008 as a result of lower debt and higher equity primarily from the AFMC earnings recognized during 2009. See Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past three years ended December 31 (in millions of dollars):

 

     2010     2009     2008  

Total cash provided by (used for):

      

Operating activities

   $ 495      $ 307      $ 340   

Investing activities

     (143     (93     (330

Financing activities

     (78     (202     (128

Effect of exchange rate changes on cash

     —          1        (1
                        

Increase (decrease) in cash and cash equivalents

   $ 274      $ 13      $ (119
                        

Cash Provided by Operating Activities

Cash provided by operating activities in 2010 increased from 2009 as higher Timber and Performance Fibers earnings from operations and a cash refund related to the AFMC were partially offset by a $42 million increase to pension contributions and higher working capital requirements. The timing of customer rebates and income tax payments were the major drivers of the working capital change.

Cash provided by operating activities in 2009 decreased from 2008 primarily due to lower earnings from operations as a result of weaker markets in Timber and Real Estate, partially offset by higher operating results in Performance Fibers due to strong demand.

Cash Used for Investing Activities

Cash used for investing activities in 2010 rose 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. Additionally, restricted cash increased over prior year due to the timing of like-kind exchange transactions.

Cash used for investing activities in 2009 decreased from 2008, which included the purchase of $230 million of timberlands as well as higher capital expenditures.

Cash Used for Financing Activities

Cash used for financing activities in 2010 decreased from 2009 as 2010 included net borrowings of $60 million, while 2009 included $40 million in net repayments, as well as costs related to the August 2009 issuance of Senior Exchangeable Notes due 2015. (See Note 11 — Debt for further information on the Senior Exchangeable Notes.) Additionally, cash proceeds on stock options exercised were $15 million higher in 2010.

Cash used for financing activities in 2009 increased over 2008 due to the net paydown of $40 million in debt during 2009 compared to $21 million in net borrowings during 2008, as well as costs related to the August 2009 issuance of Senior Exchangeable Notes due 2015.

 

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Expected 2011 Expenditures

Capital expenditures in 2011 are forecasted to be between $140 million and $145 million. Our 2011 dividend payments are expected to increase from $165 million to $175 million assuming no change in the quarterly dividend rate of $0.54 per share. We have a $93 million note payable which matures at December 31, 2011. We expect to repay this note using cash on hand, however, we may issue new debt.

We made discretionary pension contributions of $50 million in 2010, compared to pension contributions of $10 million in 2009, of which $8 million was mandatory. We have no mandatory pension contributions in 2011, and we do not expect to make any discretionary contributions. Cash payments for income taxes in 2011 are anticipated to be between $5 million and $10 million. Expenditures of $12 million for environmental costs related to our dispositions and discontinued operations are expected in 2011. See Note 14 — Liabilities for Dispositions and Discontinued Operations for further information.

We are currently in the evaluation stage to convert our existing absorbent materials line at Jesup, Georgia to produce high purity cellulose specialties. The evaluation is expected to be completed in mid-year 2011, and if approved, the estimated cost of the project will be $250 million to $300 million over the next two to three years. The project may be funded by cash on hand or incurring new debt.

Performance and Liquidity Indicators

The discussion below is presented to enhance the reader’s understanding of our operating performance, 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 described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA as a performance measure and Adjusted CAD as a liquidity measure. 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 Net Income to EBITDA and a table of EBITDA by segment for the five years ended December 31 (in millions of dollars):

 

     2010      2009      2008      2007      2006  

Net Income to EBITDA Reconciliation

              

Net Income

   $ 218       $ 313       $ 149       $ 174       $ 176   

Income tax expense

     15         46         29         23         22   

Interest, net

     49         51         49         50         40   

Depreciation, depletion and amortization

     143         158         168         165         136   
                                            

EBITDA(a)

   $ 425       $ 568       $ 395       $ 412       $ 374   
                                            

 

     2010     2009     2008     2007     2006  

EBITDA by Segment

          

Timber

   $ 92      $ 77      $ 116      $ 146      $ 152   

Real Estate

     75        80        101        98        91   

Performance Fibers

     272        242        205        209        153   

Wood Products

     5        (6     (2     (2     4   

Other Operations

     1        (3     3        (3     2   

Corporate and other(a)

     (20     178        (28     (36     (28
                                        

EBITDA(a)

   $ 425      $ 568      $ 395      $ 412      $ 374   
                                        

 

(a)

The results for 2010 include a gain of $12 million from the sale of a portion of the Company’s interest in its New Zealand JV. The results for 2009 include $205 million related to the AFMC.

 

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Excluding the AFMC and the gain from the New Zealand JV sale, 2010 EBITDA was $50 million above prior year primarily due to higher operating results. Excluding the AFMC, 2009 EBITDA decreased $32 million from 2008 primarily due to lower operating results in our Timber and Real Estate segments, partially offset by higher operating results in our Performance Fibers segment. See Item 6 — Selected Financial Data for a reconciliation of EBITDA to Operating Income by segment.

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

Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD for the five years ended December 31 (in millions):

 

     2010     2009     2008     2007     2006  

Cash used for investing activities

   $ (143   $ (93   $ (330   $ (126   $ (385
                                        

Cash used for financing activities

   $ (78   $ (202   $ (128   $ (58   $ (30
                                        

Cash provided by operating activities

   $ 495      $ 307      $ 340      $ 324      $ 307   

Capital expenditures

     (138     (92     (105     (97     (105

LKE tax benefits on third-party real estate sales(a)

     —          —          (12     (4     (4

Change in committed cash

     12        17        (10     17        (19

Excess tax benefits on stock-based compensation

     5        3        3        8        4   

Other

     10        (2     —          1        (1
                                        

CAD

     384        233        216        249        182   

Mandatory debt repayments

     (1     (123     (24     (163     (3
                                        

Adjusted CAD

   $ 383      $ 110      $ 192      $ 86      $ 179   
                                        

 

(a)

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

Adjusted CAD increased $273 million in 2010 primarily due to the receipt of a $189 million refund related to the AFMC and higher operating results. Adjusted CAD was $110 million in 2009, an $82 million decrease from 2008 primarily due to higher mandatory debt repayments. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.

Liquidity Facilities

We have a $250 million unsecured revolving credit facility at an interest rate of LIBOR plus 40 basis points. We plan to refinance the facility before it expires in August 2011. At December 31, 2010, the available borrowing capacity was $245 million.

In March 2010, TRS borrowed $75 million under a five-year term loan agreement at LIBOR plus 275 basis points. See Note 11 — Debt for additional information on this agreement and other outstanding debt, as well as for information on covenants which must be met in connection with our installment notes, term loan and the $250 million revolving credit facility.

Both our ability to obtain financing and the related costs of borrowing are affected by our credit ratings, which are periodically reviewed by the rating agencies. In February 2011, Standard & Poor’s Ratings Services raised its ratings on Rayonier, including our corporate credit rating, to ‘BBB+’ from ‘BBB’. In April 2010, Moody’s Investors Service raised its investment grade rating from ‘Baa3’ to ‘Baa2’ on our long-term debt and affirmed a ‘Stable’ outlook.

 

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Off-Balance Sheet Arrangements

We utilize off-balance sheet arrangements to provide credit support for certain suppliers/vendors and customers in case of their default on critical obligations, and collateral for certain self-insurance programs that we maintain. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 16 — Guarantees for further discussion.

Contractual Financial Obligations

In addition to using cash flow from operations, we finance our operations through the issuance of debt and by entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction, with the result that some are recorded as liabilities on the Balance Sheet, while others are required to be disclosed in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.

The following table aggregates our contractual financial obligations as of December 31, 2010 and anticipated cash spending by period:

 

Contractual Financial Obligations (in millions)

   Total      Payments Due by Period  
      2011      2012-2013      2014-2015      Thereafter  

Long-term debt(a)

   $ 698       $ —         $ 323       $ 360       $ 15   

Current maturities of long-term debt

     93         93         —           —           —     

Interest payments on long-term debt(b)

     122         40         52         29         1   

Operating leases — timberland(c)

     92         7         14         13         58   

Environmental obligations(d)

     51         6         38         7         —     

Postretirement obligations(e)

     33         3         6         7         17   

Operating leases — PP&E, offices

     12         2         3         3         4   

Uncertain tax positions(f)

     —           —           —           —           —     

Purchase obligations

     9         8         1         —           —     

Other long-term liabilities

     1         —           1         —           —     
                                            

Total contractual cash obligations

   $ 1,111       $ 159       $ 438       $ 419       $ 95   
                                            

 

(a)

The book value of our long-term debt is currently recorded at $675 million on the Company’s consolidated balance sheet, but upon maturity the liability will be $698 million.

(b)

Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates as of December 31, 2010.

(c)

The majority of timberland leases are subject to changes in either the Consumer Price Index or the Producer Price Index.

(d)

These obligations relate to the Jesup mill 2008 consent order. See Environmental Regulation below for additional information on the Jesup mill consent order.

(e)

The amounts represent an estimate of our projected payments related to our unfunded excess pension plan and our postretirement medical and life insurance plans for the next ten years. See Note 19 — Employee Benefit Plans for additional information.

(f)

The settlement date is unknown for approximately $22 million of uncertain tax positions. This amount has been excluded from the table above. See Note 8 — Income Taxes for additional information on uncertain tax positions.

In May 2010, we filed a universal shelf registration, replacing an expiring 2007 shelf registration, giving us the ability to issue and sell an indeterminate amount of various types of debt and equity securities. In May 2004, we completed a Form S-4 acquisition shelf registration to offer and issue 7.0 million common shares for the acquisition of other businesses, assets or properties. As of December 31, 2010, no common shares have been offered or issued under the Form S-4 shelf registration.

New Accounting Standards

See Note 2 — Summary of Significant Accounting Policies for discussion of recently issued accounting pronouncements that will affect our financial results and disclosures in future periods.

 

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Index to Financial Statements

Environmental Regulation

Rayonier is subject to stringent environmental laws and regulations concerning air emissions, wastewater discharges, waste handling and disposal, and assessment and remediation of environmental contamination. Such environmental laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws and regulations. Management closely monitors its environmental responsibilities and believes we are in substantial compliance with current environmental requirements. In addition to ongoing compliance with laws and regulations, our facilities operate in accordance with various permits, which are issued by state and federal environmental agencies. Many of these permits impose operating conditions on the Company which require significant expenditures to ensure compliance. Upon renewal and renegotiation of these permits, the issuing agencies often seek to impose new or additional conditions in response to new environmental laws and regulations, or more stringent interpretations of existing laws and regulations. During 2010, 2009 and 2008, we spent approximately $23 million, $10 million and $18 million, respectively, for capital projects related to environmental compliance for ongoing operations. During 2011 and 2012, our capital spending related to environmental compliance for continuing operations is expected to be approximately $20 million and $65 million, respectively. Over the next five years we expect environmental capital spending to total between $130 million and $135 million. The expected increase in environmental spending is primarily due to a 2008 Jesup mill consent order (in which we agreed to implement certain capital improvements relating to the mill’s wastewater treatment) as well as improvement to our manufacturing process and pollution control systems that will comply with the requirements of new or renewed air emission and water discharge permits, and other required improvements for our Performance Fibers mills.

Our discontinued operations with historical environmental contamination are subject to a number of federal, state and local laws. For example, former operations at the SWP wood treating sites used preservative formulations consisting primarily of creosote, pentachlorophenol and chromated-copper arsenate. Investigations performed at the SWP sites over the years have identified releases to soils, groundwater and sediments containing free product and constituents or derivatives of these formulations including, but not limited to, all or some combination of petroleum products, metals (e.g., arsenic, chromium) and/or organics (e.g., volatile organic compounds, phenols, polycyclic aromatic hydrocarbons, dioxins and furans). As it has for many years, SWP continues to actively work with federal and state environmental agencies to undertake appropriate steps to investigate and remediate these sites in accordance with applicable laws. As these requirements change over time, they may mandate more stringent levels of soil and groundwater investigation, remediation and monitoring. While we believe that our current estimates are adequate, future changes to these legal requirements could adversely affect the cost and timing of our activities on these sites.

Notwithstanding Rayonier’s current compliance status, many of its operations are subject to constantly changing environmental requirements which are often the result of legislation, regulation, litigation and negotiation. For additional information see Item 1A — Risk Factors for a discussion of the potential impact of environmental laws and regulations, including climate-related initiatives, on our businesses.

It is the opinion of management that substantial expenditures will be required over the next ten years in the area of environmental compliance. See Note 14 — Liabilities for Dispositions and Discontinued Operations, for additional information regarding the Company’s environmental liabilities.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market and Other Economic Risks

We are exposed to various market risks, including changes in interest rates, commodity prices and foreign exchange rates. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Audit Committee of the Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes.

Cyclical pricing of commodity market paper pulp is one of the factors which influences Performance Fibers’ prices in the absorbent materials product line. However, as a non-integrated producer of absorbent materials, primarily fluff pulp, for non-papermaking end uses, our absorbent material pricing tends to lag (on both the upturn and downturn) commodity paper pulp prices with pricing adjustments that are less severe. Our cellulose specialty products’ prices are based on market supply and demand and are not correlated to commodity paper pulp prices. In addition, a significant majority of our cellulose specialty products are under long-term volume contracts that extend into 2013 and 2014.

 

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The fair market value of our long-term fixed interest rate debt is subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at December 31, 2010 was $768 million compared to $655 million in carrying value. We use interest rates of debt with similar terms and maturities to estimate the fair value of our debt. Our percentage of debt with fixed interest rates was 85 percent as of December 31, 2010. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical one-percentage point increase/decrease in prevailing interest rates at December 31, 2010 would result in a corresponding decrease/increase in the fair value of our fixed-rate debt of approximately $20 million.

We periodically enter into commodity forward contracts to fix some of our fuel oil and natural gas costs. The forward contracts partially mitigate the risk of a change in Performance Fibers margins resulting from an increase or decrease in these energy costs. At December 31, 2010, we had no fuel oil or natural gas contracts outstanding.

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to Financial Statements on page ii.

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

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

Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this annual report on Form 10-K, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the disclosure controls and procedures were effective as of December 31, 2010.

Internal Control Over Financial Reporting

With regard to the Company’s internal control over financial reporting as defined in paragraph (f) of Rule 13a-15(f), see Management’s Report on Internal Control over Financial Reporting on page F-1, followed by the Report of Independent Registered Public Accounting Firm on pages F-2 and F-3, included in Item 8 — Financial Statements and Supplementary Data of this annual report on Form 10-K.

In the quarter ended December 31, 2010, based upon the evaluation required by paragraph (d) of Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

 

Item 9B. OTHER INFORMATION

Not applicable.

 

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PART III

Certain information required by Part III is incorporated by reference from the Company’s definitive Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for the Company’s 2011 Annual Meeting of Stockholders (the “Proxy Statement”). We will make the Proxy Statement available on our website at www.rayonier.com as soon as it is filed with the SEC.

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item with respect to directors is incorporated by reference to the information in the sections entitled “Election of Directors,” “Corporate Governance,” “Executive Officers” and “Report of the Audit Committee” in the Proxy Statement. The information required by this Item with respect to disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Exchange Act is incorporated by reference to the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Our Standard of Ethics and Code of Corporate Conduct, which is applicable to our principal executive officer and financial and accounting officer, is available on our website, www.rayonier.com. Any amendments to or waivers of the Standard of Ethics and Code of Corporate Conduct will also be disclosed on our website.

 

Item 11. EXECUTIVE COMPENSATION

The information called for by Item 11 is incorporated herein by reference from the section and subsections entitled “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” “Option Exercises and Stock Vested,” “Pension Benefits,” “Nonqualified Deferred Compensation,” “Potential Payments Upon Termination or Change in Control,” “Director Compensation” and “Corporate Governance — Compensation Committee Interlocks and Insider Participation; Processes and Procedures” in the Proxy Statement.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information called for by Item 12 is incorporated herein by reference from the subsections entitled “Share Ownership of Certain Beneficial Owners,” “Share Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” in the Proxy Statement.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information called for by Item 13 is incorporated herein by reference from the section and subsections entitled “Election of Directors,” “Corporate Governance — Director Independence” and “Corporate Governance — Related Person Transactions” in the Proxy Statement.

 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by Item 14 is incorporated herein by reference from the subsection entitled “Report of the Audit Committee — Information Regarding Independent Registered Public Accounting Firm” in the Proxy Statement.

 

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PART IV

 

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as a part of this report:

 

  (1)

See Index to Financial Statements on page ii for a list of the financial statements filed as part of this report.

 

  (2)

See Schedule II — Valuation and Qualifying Accounts. All other financial statement schedules have been omitted because they are not applicable, the required matter is not present or the required information has otherwise been supplied in the financial statements or the notes thereto.

 

  (3)

See Exhibit Index for a list of the exhibits filed or incorporated herein as part of this report. Exhibits that are incorporated by reference to documents filed previously by the Company under the Securities Exchange Act of 1934, as amended, are filed with the SEC under File No. 1-6780.

(b) Exhibits:

See Item 15 (a)(3).

(c) Financial Statement Schedules:

See Item 15 (a)(2).

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To Our Shareholders:

The management of Rayonier Inc. and its subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our system of internal controls over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Because of the inherent limitations of internal control over financial reporting, misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Rayonier Inc.’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, we used the framework included in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the criteria set forth in Internal Control — Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2010.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2010. The report on the Company’s internal control over financial reporting as of December 31, 2010, is on page F-3.

LOGO

L.M. Thomas

Chairman and Chief Executive Officer

February 23, 2011

LOGO

H. E. Vanden Noort

Senior Vice President and Chief Financial Officer

February 23, 2011

 

F-1


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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Rayonier Inc.

Jacksonville, Florida

We have audited the accompanying consolidated balance sheets of Rayonier Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income and comprehensive income and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Rayonier Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2011 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

LOGO

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

February 23, 2011

 

F-2


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Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Rayonier Inc.

Jacksonville, Florida

We have audited the internal control over financial reporting of Rayonier Inc. and subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2010 of the Company and our report dated February 23, 2011, expressed an unqualified opinion on those financial statements and financial statement schedule.

 

 

LOGO

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

February 23, 2011

 

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RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

For the Years Ended December 31,

(Thousands of dollars, except per share data)

 

     2010     2009     2008  

SALES

   $ 1,315,233      $ 1,168,567      $ 1,271,048   
                        

Costs and Expenses

      

Cost of sales

     990,099        914,772        991,894   

Selling and general expenses

     67,102        62,633        64,503   

Other operating income, net (Note 3)

     (10,519     (221,172     (12,500
                        
     1,046,682        756,233        1,043,897   

Equity in income (loss) of New Zealand joint venture

     1,033        (2,826     (715
                        

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

     269,584        409,508        226,436   

Gain on sale of a portion of the interest in the New Zealand joint venture (Note 6)

     12,367        —          —     
                        

OPERATING INCOME

     281,951        409,508        226,436   

Interest expense

     (50,463     (52,441     (50,729

Interest and miscellaneous income, net

     1,315        1,810        2,312   
                        

INCOME BEFORE INCOME TAXES

     232,803        358,877        178,019   

Income tax expense

     (15,217     (46,336     (29,436
                        

NET INCOME

     217,586        312,541        148,583   
                        

OTHER COMPREHENSIVE INCOME (LOSS)

      

Foreign currency translation adjustment

     4,162        15,980        (23,508

Joint venture cash flow hedges

     837        (2,305     —     

Employee Benefit Plans

      

Retiree benefit plan amendment, net of income tax expense of $7,662 in 2008

     —          —          16,377   

Gain (loss) from amortization of pension and postretirement plans, net of income tax benefit (expense) of $1,570, ($1,401), and $27,120

     6,385        4,879        (65,527
                        

COMPREHENSIVE INCOME

   $ 228,970      $ 331,095      $ 75,925   
                        

EARNINGS PER COMMON SHARE

      

Basic earnings per share

   $ 2.71      $ 3.95      $ 1.89   
                        

Diluted earnings per share

   $ 2.68      $ 3.91      $ 1.87   
                        

See Notes to Consolidated Financial Statements.

 

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RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31,

(Thousands of dollars)

 

     2010     2009  
ASSETS   

CURRENT ASSETS

    

Cash and cash equivalents

   $ 349,463      $ 74,964   

Accounts receivable, less allowance for doubtful accounts of $387 and $1,150

     82,640        103,740   

Inventory (Note 10)

     110,035        88,504   

Income tax and alternative fuel mixture credit receivable

     21,734        192,579   

Prepaid and other current assets

     45,314        49,909   
                

Total current assets

     609,186        509,696   
                

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

     1,137,931        1,188,559   

PROPERTY, PLANT AND EQUIPMENT

    

Land

     24,752        24,789   

Buildings

     131,100        126,443   

Machinery and equipment

     1,350,812        1,275,955   
                

Total property, plant and equipment

     1,506,664        1,427,187   

Less — accumulated depreciation

     (1,121,360     (1,082,248
                
     385,304        344,939   
                

INVESTMENT IN JOINT VENTURE (NOTE 6)

     68,483        50,999   

OTHER ASSETS

     162,749        158,738   
                
   $ 2,363,653      $ 2,252,931   
                
LIABILITIES AND SHAREHOLDERS’ EQUITY   

CURRENT LIABILITIES

    

Accounts payable

   $ 57,985      $ 58,584   

Bank loans and current maturities

     93,057        4,650   

Accrued taxes

     10,337        11,994   

Accrued payroll and benefits

     25,466        23,764   

Accrued interest

     6,206        6,512   

Accrued customer incentives

     9,759        25,644   

Accrued professional fees

     10,276        10,483   

Other current liabilities

     20,362        22,832   

Current liabilities for dispositions and discontinued operations (Note 14)

     11,500        10,648   
                

Total current liabilities

     244,948        175,111   
                

LONG-TERM DEBT

     675,103        694,999   

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 14)

     81,660        87,943   

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 19)

     66,335        111,662   

OTHER NON-CURRENT LIABILITIES

     44,025        37,010   

COMMITMENTS AND CONTINGENCIES (Notes 15, 16 and 17)

    

SHAREHOLDERS’ EQUITY

    

Common Shares, 240,000,000 and 120,000,000 shares authorized, 80,682,093 and 79,541,974 shares issued and outstanding

     602,882        561,962   

Retained earnings

     717,058        663,986   

Accumulated other comprehensive loss

     (68,358     (79,742
                
     1,251,582        1,146,206   
                
   $ 2,363,653      $ 2,252,931   
                

See Notes to Consolidated Financial Statements.

 

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Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

(Thousands of dollars)

 

     2010     2009     2008  

OPERATING ACTIVITIES

      

Net income

   $ 217,586      $ 312,541      $ 148,583   

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

      

Depreciation, depletion and amortization

     143,406        158,371        168,239   

Non-cash cost of real estate sold

     6,692        7,634        11,145   

Stock-based incentive compensation expense

     15,223        15,754        13,344   

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

     (11,545     —          —     

Amortization of convertible debt discount

     8,160        6,517        5,437   

Deferred income taxes

     14,936        (6,260     11,576   

Excess tax benefits on stock-based compensation

     (5,411     (2,720     (3,248

Other

     11,309        11,080        6,255   

Changes in operating assets and liabilities:

      

Receivables

     20,774        (26,863     1,794   

Inventories

     (27,693     9,202        (15,946

Accounts payable

     (4,606     (12,552     6,128   

Income tax and alternative fuel mixture credit receivable

     170,845        (190,694     9,513   

Other current assets

     2,573        (3,793     (4,383

Accrued liabilities

     (12,805     28,317        (7,245

Other assets

     (1,863     1,422        4,736   

Other non-current liabilities

     (43,559     7,438        (8,080

Expenditures for dispositions and discontinued operations

     (8,632     (8,095     (7,660
                        

CASH PROVIDED BY OPERATING ACTIVITIES

     495,390        307,299        340,188   
                        

INVESTING ACTIVITIES

      

Capital expenditures

     (138,449     (91,667     (104,806

Purchase of timberlands

     (5,360     —          (229,701

Purchase of real estate

     —          —          (4,336

Change in restricted cash

     (8,231     1,399        8,523   

Other

     9,384        (2,476     (71
                        

CASH USED FOR INVESTING ACTIVITIES

     (142,656     (92,744     (330,391
                        

FINANCING ACTIVITIES

      

Issuance of debt (Note 11)

     157,000        267,500        173,800   

Repayment of debt

     (96,650     (307,643     (152,685

Dividends paid

     (163,673     (158,218     (156,978

Proceeds from the issuance of common shares

     26,314        11,115        8,265   

Excess tax benefits on stock-based compensation

     5,411        2,720        3,248   

Purchase of exchangeable note hedge (Note 11)

     —          (23,460     —     

Proceeds from issuance of warrant (Note 11)

     —          12,506        —     

Debt issuance costs

     (561     (4,678     —     

Repurchase of common shares

     (6,028     (1,388     (3,979
                        

CASH USED FOR FINANCING ACTIVITIES

     (78,187     (201,546     (128,329
                        

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     (48     270        (864
                        

CASH AND CASH EQUIVALENTS

      

Increase (decrease) in cash and cash equivalents

     274,499        13,279        (119,396

Balance, beginning of year

     74,964        61,685        181,081   
                        

Balance, end of year

   $ 349,463      $ 74,964      $ 61,685   
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      

Cash paid during the year:

      

Interest

   $ 39,991      $ 41,433      $ 42,691   
                        

Income taxes

   $ 11,776      $ 8,824      $ 12,752   
                        

Non-cash investing activity:

      

Capital assets purchased on account

   $ 12,388      $ 8,722      $ 8,675   
                        

See Notes to Consolidated Financial Statements.

 

F-6


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands unless otherwise stated)

 

1.

NATURE OF BUSINESS OPERATIONS

Rayonier Inc. (“Rayonier” or “the Company”) is 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. The Company owns, leases or manages approximately 2.4 million acres of timberland and real estate located in the United States and New Zealand. Included in this property is over 0.2 million acres of high value real estate located primarily along the coastal region from Savannah, Georgia to Daytona Beach, Florida, which is referred to as the “coastal corridor.” The Company owns and operates two specialty cellulose fibers mills in the United States. In addition, the Company manufactures lumber in three sawmills in Georgia and engages in the trading of logs.

Rayonier operates in four reportable business segments: Timber, Real Estate, Performance Fibers, and Wood Products. See Note 4 — Segment and Geographical Information for further discussion.

The Company is a Real Estate Investment Trust (“REIT”). The Company is generally not required to pay federal income taxes on its U.S. timber harvest earnings and other REIT operations contingent upon meeting applicable distribution, income, asset, shareholder and other tests. The U.S. timber operations are primarily conducted by the Company’s wholly-owned subsidiary, Rayonier Forest Resources, L.P. (“RFR”). Non-REIT qualifying and certain foreign operations, which are subject to corporate-level tax on earnings, are operated by our wholly-owned taxable subsidiary, Rayonier TRS Holdings Inc. (“TRS”). These operations include the Performance Fibers, Wood Products and trading businesses, as well as the Real Estate segment’s entitlement and sale of higher and better use (“HBU”) properties.

Timber

The Company’s Timber segment owns, leases or manages approximately 2.3 million acres of timberlands located in the U.S. and New Zealand. The Timber segment conducts activities that relate to the harvesting of timber in addition to managing timberlands and selling timber and logs to third parties.

Real Estate

Rayonier has invested in timberlands seeking to maximize its total return from a full cycle of ownership, which includes selling portions of its asset base to capture the appreciated value. An increasing portion of Rayonier’s acreage has become more valuable for development, recreational or conservation purposes than for growing timber. As a result, the Company has expanded its focus to include more value-added real estate activities such as seeking entitlements. The Company’s Real Estate subsidiary, TerraPointe LLC, owns approximately 0.1 million acres.

Performance Fibers

Rayonier is a manufacturer of high-performance cellulose fibers with two production facilities in Jesup, Georgia and Fernandina Beach, Florida, which have a combined annual capacity of approximately 745,000 metric tons. These fiber products are sold throughout the world to companies that produce a wide variety of products, including cigarette filters, foods, pharmaceuticals, textiles, electronics and various industrial applications. Approximately 61 percent of performance fiber sales are to export customers, primarily in Asia and Europe.

Cellulose specialties — Rayonier is a producer of specialty cellulose products, most of which are used in dissolving chemical applications that require a highly purified form of cellulose fiber. The Company concentrates on producing the most high-value, technologically-demanding forms of cellulose specialty products, such as cellulose acetate and high-purity cellulose ethers, and is a leading supplier of these products.

Absorbent materials — Rayonier is a producer of fibers for absorbent hygiene products. These fibers are typically referred to as fluff fibers and are used as an absorbent medium in products such as disposable baby diapers, feminine hygiene products, incontinence pads, convalescent bed pads, industrial towels and wipes and non-woven fabrics.

 

F-7


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

1.

NATURE OF BUSINESS OPERATIONS (Continued)

 

Wood Products

The Company operates and sells dimension lumber products through three lumber manufacturing facilities in the southeastern U.S.

Other

Rayonier operates a log trading business.

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Rayonier and its subsidiaries, in which it has a majority ownership or controlling interest. All intercompany balances and transactions are eliminated. For income tax purposes, the Company files two U.S. federal income tax returns, one for REIT operations and a consolidated filing for TRS operations, as well as numerous state, local and foreign income tax returns.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. There are risks inherent in estimating and therefore actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits with original maturities of three months or less.

Inventory

Inventories are valued at the lower of cost or market. The costs of manufactured performance fibers are determined on the first-in, first-out basis. Other products are valued on an average cost basis. Inventory costs include material, labor and manufacturing overhead. Physical counts of inventories are taken at least annually. The need for a provision for estimated losses from obsolete, excess or slow-moving inventories is reviewed periodically.

HBU real estate properties that are expected to be sold within one year are included in inventory, while properties that are expected to be sold after one year are included in “Other assets.”

Equity Method Investments

The Company accounts for its interest in a New Zealand joint venture (“JV”) in accordance with generally accepted accounting principles under the equity method of accounting. Rayonier does not have a controlling financial interest but exerts significant influence over the JV’s operating and financial policies as manager of the JV.

Timber

Timber is stated at the lower of cost or market value. Costs relating to acquiring, planting and growing of timber including real estate taxes, lease rental payments and site preparation are capitalized. Such accumulated costs attributed to merchantable timber are charged to cost of goods sold (depletion) at the time the timber is harvested or when the underlying

 

F-8


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

timberland is sold based on the relationship of timber sold to the estimated volume of currently merchantable timber. Upon the acquisition of timberland, the Company makes a determination on whether to combine the newly acquired merchantable timber with an existing depletion pool or to create a new separate pool. This determination is based on the geographic location of the new timber, the customers/markets that will be served and the species mix. If the acquisition is similar, the cost of the acquired timber is combined into an existing depletion pool and a new depletion rate is calculated for the pool. This determination and depletion rate adjustment normally occurs in the quarter following the acquisition, concurrent with the harvesting of the acquired timber.

Property, Plant, Equipment and Depreciation

Property, plant and equipment additions are recorded at cost, including applicable freight, taxes, interest, construction and installation costs. Pulp mill assets are depreciated using the units-of-production method. The Company depreciates its non-production Performance Fiber assets, including office, lab and transportation equipment, using the straight-line depreciation method over 3 to 25 years. In addition, all of the assets at the Company’s sawmills are depreciated using the straight-line method over 3 to 15 years. Buildings and land improvements are depreciated using the straight-line method over 15 to 35 years and 5 to 30 years, respectively.

Gains and losses on the retirement of assets are included in operating income. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets that are held and used is measured by net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying value exceeds the fair value of the assets, which is based on a discounted cash flow model. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy that prioritizes the inputs used to measure fair value was established as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

See Note 5 — Fair Value Measurements and Note 19 — Employee Benefit Plans for additional information on the Company’s fair value disclosures.

Foreign Currency Translation

The functional currency of the Company’s New Zealand-based operations and its JV investment is the New Zealand dollar. All assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the respective balance sheet dates with the resulting translation gain or loss recorded as a separate component of Accumulated Other Comprehensive Income/(Loss), (“AOCI”), within Shareholders’ Equity.

 

F-9


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Financial Instruments

The Company is exposed to various market risks, including changes in interest rates and commodity prices. The Company’s objective is to partially mitigate the economic impact of these market risks. Derivatives are used, as noted below, in accordance with policies and procedures approved by the Audit Committee of the Board of Directors and are managed by a senior executive committee, whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into such financial instruments for trading or speculative purposes.

Derivative financial instruments such as commodity swap agreements are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Transactions that provide for the forward purchase or sale of raw materials are not included in the financial statements until physical delivery of the product, as these transactions are done in the normal course of business and qualify for treatment under the normal purchases and sales scope exception under generally accepted accounting principles.

The Company periodically 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. The Company’s commodity agreements do not qualify for hedge accounting and are marked to market. Gains or losses resulting from the valuation are recorded in “Other operating income, net.”

See Note 5 — Fair Value Measurements for additional information on the Company’s derivative financial instruments.

Revenue Recognition

The Company generally recognizes revenues when the following criteria are met: (i) persuasive evidence of an agreement exists, (ii) delivery has occurred, (iii) the Company’s price to the buyer is fixed and determinable, and (iv) collectibility is reasonably assured.

Revenue from the sale of timber is recorded when title passes to the buyer. Timber sales are either sales of delivered logs or stumpage sales. Stumpage sales in the Eastern and Western regions are primarily made on a pay-as-cut basis. These contracts generally require a minimum 15 percent initial payment and title and risk of loss are transferred when the timber is cut. Sales of delivered logs generally do not require an initial payment and are made to third-party customers on open credit terms.

Real estate sales are recorded when title passes, full payment or a minimum down payment of 25 percent is received and full collectibility is assured. If a down payment of less than 25 percent is received at closing or if full collectibility is not reasonably assured, the Company typically records revenue based on the installment method or cost recovery method.

Revenue from domestic sales of Performance Fibers products is recorded when title passes which, depending on the contract, is either at time of shipment or when the customer receives goods. Foreign sales of Performance Fibers products are recorded when the customer or agent receives the goods and title passes.

Lumber sales are recorded when the goods are shipped and title passes.

The Company’s Other segment includes log trading sales. Revenue is recorded when the goods are received by the customer and title passes.

Environmental Costs

Rayonier expenses environmental costs related to ongoing businesses resulting from current operations. Expenditures that meaningfully extend the life or increase the efficiency of operating assets are capitalized.

 

F-10


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company has established liabilities to remediate and monitor sites related to dispositions or discontinued operations from which no current or future benefit is discernible. These obligations are established based on payments over the next 20 years and require significant estimates to determine the proper amount at any point in time. Generally, monitoring expense obligations are fixed once remediation projects are at or near completion. The projected period, from 2011 through 2030, reflects the time in which potential future costs are both estimable and probable. As new information becomes available, these cost estimates are updated and the Company adjusts its recorded liabilities appropriately. Environmental liabilities are accounted for on an undiscounted basis and are reflected in current and non-current “Liabilities for dispositions and discontinued operations” in the Consolidated Balance Sheet.

Income Taxes

The Company accounts for income taxes using the asset and liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The Company recognizes the effect of a change in income tax rates on deferred tax assets and liabilities in the Consolidated Statement of Income and Comprehensive Income in the period that includes the enactment date of the rate change. The Company records a valuation allowance to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

In determining the provision for income taxes, the Company computes an annual effective income tax rate based on annual income by legal entity, permanent differences between book and tax, and statutory income tax rates by jurisdiction. The effective tax rate also reflects an assessment of the ultimate outcome of uncertain tax positions. The Company adjusts its annual effective tax rate as additional information on outcomes or events becomes available. Discrete items such as audit settlements are recognized in the period in which they occur.

The Company’s income tax returns are subject to audit by U.S. federal, state and foreign taxing authorities. In evaluating the tax benefits associated with various tax filing positions, the Company records a tax benefit for an uncertain tax position if it is more-likely-than-not to be realized upon ultimate settlement of the issue. The Company records a liability for an uncertain tax position that does not meet this criterion. The Company adjusts its liabilities for unrecognized tax benefits in the period in which it is determined the issue is settled with the taxing authorities, the statute of limitations expires for the relevant taxing authority to examine the tax position or when new facts or information becomes available. Liabilities for unrecognized tax benefits are included in “Other current liabilities” and “Other non-current liabilities” in the Company’s Consolidated Balance Sheets. See Note 8 — Income Taxes for additional information.

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 consolidated financial statements. See Note 5 — 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

 

F-11


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 5 — Fair Value Measurements for additional information about this entity.

 

3.

ALTERNATIVE FUEL MIXTURE CREDIT (“AFMC”) AND CELLULOSIC BIOFUEL PRODUCER CREDIT (“CBPC”)

The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. The AFMC was a $.50 per gallon refundable excise tax credit (which the Company believes is not taxable), while the CBPC was a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity’s tax liability. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers mills, which qualified for both credits. Rayonier claimed the AFMC credit on its 2009 tax return, and accordingly, the 2009 Consolidated Statement of Income and Comprehensive Income includes income of $205.2 million, net of associated expenses, recorded in “Other operating income, net” for black liquor produced and used.

In October 2010, the Internal Revenue Service (“IRS”) released clarification that both the AFMC and CBPC can be claimed in the same taxable year for different volumes of black liquor. Rayonier received approval from the IRS to claim the CBPC credit. As a result, the 2010 Consolidated Statement of Income and Comprehensive Income includes a tax credit of $24.3 million recorded in “income tax expense” for black liquor produced and used in 2009, which was not eligible for the AFMC.

 

4.

SEGMENT AND GEOGRAPHICAL 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 as 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.

Operating income (loss) as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income (loss). Certain income (loss) items in the 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.

Two customers in the Performance Fibers segment represented 14 percent and 10 percent of the Company’s consolidated sales in 2010, respectively. Three customers in the Performance Fibers segment represented 13 percent, 12 percent and 11 percent of the Company’s consolidated sales in 2009, respectively, and two customers in the Performance Fibers segment represented 12 percent and 10 percent of the Company’s consolidated sales in 2008.

 

F-12


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

4.

SEGMENT AND GEOGRAPHICAL INFORMATION (Continued)

 

Segment information for each of the three years ended December 31, 2010 follows (in millions of dollars):

 

     Sales  
     2010     2009     2008  

Timber

   $ 177      $ 159      $ 199   

Real Estate

     96        101        127   

Performance Fibers

     881        839        798   

Wood Products

     68        51        86   

Other Operations

     102        38        61   

Intersegment Eliminations(a)

     (9     (19     —     
                        

Total

   $ 1,315      $ 1,169      $ 1,271   
                        

 

(a)

Intersegment eliminations reflect sales from our Timber segment to our Performance Fibers segment.

 

     Operating Income/(Loss)  
        2010           2009           2008     

Timber

   $ 33      $ 7      $ 31   

Real Estate

     53        56        80   

Performance Fibers

     214        184        149   

Wood Products

     2        (11     (7

Other Operations(a)

     1        (3     3   

Corporate and other(b)

     (21     177        (30
                        

Total

   $ 282      $ 410      $ 226   
                        

 

(a)

2010, 2009, and 2008 include a $1.1 million loss, a $2.3 million loss and a $3.2 million gain, respectively, for foreign currency transaction gains or losses related to the Company’s foreign operations.

(b)

2010 includes a $12 million gain from the sale of a portion of the Company’s interest in its New Zealand JV. 2009 includes $205 million related to the AFMC. See Note 6 — Joint Venture Investment and Note 3 — Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”) for additional information.

 

     Gross Capital Expenditures  
        2010            2009            2008     

Timber(a)

   $ 41       $ 32       $ 265   

Real Estate

     —           —           4   

Performance Fibers

     98         59         67   

Wood Products

     1         1         2   

Corporate and other

     4         —           1   
                          

Total

   $ 144       $ 92       $ 339   
                          

 

(a)

Includes strategic timberland acquisitions of $5 million, $0 and $230 million in 2010, 2009 and 2008, respectively.

 

F-13


Table of Contents
Index to Financial Statements

RAYONIER INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollar amounts in thousands unless otherwise stated)

 

 

4.

SEGMENT AND GEOGRAPHICAL INFORMATION (Continued)

 

     Depreciation,
Depletion and  Amortization
 
        2010            2009            2008     

Timber

   $ 59       $ 70       $ 85   

Real Estate

     22         24         21   

Performance Fibers

     58         58         56   

Wood Products

     3         5         5   

Corporate and other

     1         1         1   
                          

Total

   $ 143       $ 158       $ 168   
                          

 

     Identifiable Assets  
     2010      2009  

Timber

   $ 1,260       $ 1,260   

Real Estate

     86         71   

Performance Fibers

     551         518   

Wood Products

     20         22   

Other Operations

     26         19   

Corporate and other

     421         363   
                 

Total

   $ 2,364       $ 2,253   
                 

 

     Sales by Product Line  
     2010      2009      2008  

Timber

   $ 177       $ 159       $ 199   

Real Estate

        

Development

     3         3         5   

Rural

     28         32         48   

Non-Strategic Timberlands

     65         66         74   
                          

Total Real Estate

     96         101         127   
                          

Performance Fibers

        

Cellulose specialties

     686         658         600   

Absorbent materials

     195         181         198   
                          

Total Performance Fibers

     881         839         798   
                          

Wood Products

     68         51         86   

Other

     93         19         61   
                          

Total Sales

   $ 1,315       $ 1,169       $ 1,271