Rayonier 2011 10K
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, 2011
OR
o
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  o

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 o       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  o
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  o
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.  o
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  o
Non-accelerated filer  o
  
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o        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, 2011 was $3,502,731,055 based on the closing sale price as reported on the New York Stock Exchange.

As of February 22, 2012, there were outstanding 122,436,252 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 2012 annual meeting of the shareholders of the registrant scheduled to be held May 17, 2012, are incorporated by reference in Part III hereof.


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS
 
Item
 
  
Page
 
 
PART I
 
1.
 
1A.
 
1B.
 
2.
 
3.
 
4.
 
 
 
PART II
 
5.
 
6.
 
7.
 
7A.
 
8.
 
9.
 
9A.
 
9B.
 
 
 
PART III
 
10.
 
11.
 
12.
 
13.
 
14.
 
 
 
PART IV
 
15.
 
 

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INDEX TO FINANCIAL STATEMENTS
 
 
Page
 
 
 
 
INDEX TO FINANCIAL STATEMENT SCHEDULES
 
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.
 
 
 


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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 believe that Rayonier is the seventh largest private timberland owner in the U.S. We own, lease or manage approximately 2.7 million acres of timberland and real estate located in the United States and New Zealand. Included in this property is approximately 200,000 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 and geographic region, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3Segment and Geographical Information.
Our corporate strategy is to:
 
Increase the size and quality of our timberland holdings through timberland acquisitions while selling timberlands that no longer meet our strategic or financial return requirements. In 2011, we acquired 308,000 acres of U.S. timberlands and our New Zealand joint venture ("JV") acquired 10,000 acres of timberlands.
 
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 products for customer specific applications. We emphasize operational excellence to ensure quality, reliability and efficiency. In 2011, we began converting the fluff pulp line at our Jesup, Georgia mill to produce cellulose specialties products. We expect this conversion to be complete in mid-2013.
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.
Our U.S. timber operations are primarily conducted by our wholly-owned REIT subsidiaries. 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

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entitlement of HBU properties.
Forest Resources
Effective first quarter 2011, we reorganized our United States timber operations from the Eastern and Western regions into the Atlantic (Florida and Georgia), Gulf States (Alabama, Arkansas, Louisiana, Mississippi, Oklahoma and Texas) and Northern (New York and Washington) regions. Additionally, we renamed the Timber segment, Forest Resources.
Our Forest Resources segment owns, leases or manages approximately 2.6 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.
In 2011, we acquired approximately 308,000 acres of U.S. timberlands primarily located in the Gulf States region. See Note 6Timberland Acquisitions for additional information on our timberland acquisitions.
Our Atlantic U.S. timberland holdings consist of approximately 1.1 million acres. Approximately two-thirds of this land supports intensively managed plantations of predominantly slash pine and loblolly pine. The other third of this land is too wet to support pine plantations, but supports productive natural stands of slash pine, cypress, black gum, water oaks, red maple, sweetgum and other commercial hardwood species.
 
Our Gulf States U.S. timberland holdings consist of approximately 0.7 million acres. Approximately four-fifths of this land supports pine plantations of predominantly loblolly pine. The other one-fifth of this land is too wet or too steep to support pine plantations, but supports productive natural stands of loblolly pine, water oaks, black gum, sweetgum and other commercial hardwood species.
Our Northern U.S. timberland holdings consist of approximately 0.5 million acres. Washington timberlands constitute 0.4 million acres and are primarily second and third growth western-hemlock, Douglas-fir, Sitka spruce, and western red cedar. Approximately 87 percent of the merchantable volume of the Washington timberlands is western-hemlock and Douglas-fir. A small percentage of the Washington timberlands supports natural hardwood stands of predominantly red alder. New York timberlands are almost entirely managed as uneven, aged stands of Appalachian hardwood and softwood species. The predominant species are red maple, sugar maple, spruce-fir, beech, black cherry, and yellow birch.
In the Atlantic and Gulf regions, rotation ages range from 21 to 25 years for pine plantations and from 35 to 60 years for natural hardwood stands. End use markets for these timberlands include pulp, paper, and wood products facilities. In the Northern region, rotation ages range from 35 to 50 years in Washington and 40 to 80 years in New York, with the primary product in both states being sawtimber.
In addition, we have a 26 percent interest in a New Zealand joint venture, 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 restricted or environmentally sensitive areas and economically inaccessible swamplands is not included in the merchantable inventory shown here.
The following table sets forth the estimated volumes of merchantable timber in the U.S. by location and type, as of December 31, 2011 (in thousands of short green tons): 
Location
Softwood
 
Hardwood
 
Total
 
%
Atlantic
23,165

 
11,482

 
34,647

 
46

Gulf
20,198

 
5,729

 
25,927

 
34

Northern
10,315

 
4,780

 
15,095

 
20

 
 
 
 
 
75,669

 
100

We manage our U.S. 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, fertilization, timing of thinning and final harvest. We also have a genetic tree improvement program to enhance the productivity and quality of our timber and overall forest health. 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

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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.
Real Estate
Our Real Estate subsidiary owns approximately 0.1 million acres of land. We segregate our real estate holdings into three groups: development HBU, rural HBU (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, 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.
In May 2011, our Board of Directors (the "Board") approved a $300 million capital project to convert a fiber line at our Jesup, Georgia mill from production of absorbent materials to cellulose specialties (the "cellulose specialties expansion" or "CSE"). The CSE will add approximately 190,000 metric tons of cellulose specialties capacity, bringing total cellulose specialties capacity to about 675,000 metric tons. Upon completion of the CSE project, we will be exiting the more commodity-like absorbent materials business (about 260,000 metric tons of capacity). With commitments for 85 percent of the new volume already in hand, this additional volume is close to being fully committed. We spent $43 million on the project in 2011 and we are on pace to complete the CSE project by mid-2013. This expansion will help further differentiate our business as we will be able to increase our focus on high-end specialty pulp and the development of customer specific applications.
Approximately 63 percent of Performance Fibers sales are exported, primarily to customers in Asia and Europe. Approximately 96 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 through 2013 to 2017 and represent a significant majority of our high value cellulose specialties production.
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 2011, we continued to operate at reduced production levels due to soft demand from a weak housing market and expect to operate at reduced production levels in 2012 unless market conditions improve.
Lumber sales are primarily made by Rayonier personnel to customers in the southeastern U.S. Approximately 71 percent of our lumber mills’ wood chip production is sold at market prices to our Jesup, Georgia Performance Fibers facility. In 2011, these purchases represented approximately 11 percent of that facility’s total wood consumption.
Other
The primary business of our Other segment is trading logs.


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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; and other miscellaneous assets held for disposition. See Note 15Liabilities for Dispositions and Discontinued Operations for additional information.
Foreign Sales and Operations
Sales from non-U.S. operations comprised approximately seven percent of consolidated 2011 sales. See Note 3 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, when appropriate, 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 our Atlantic, Gulf and Northern regions are relatively fragmented. In the Atlantic and Gulf regions, we compete with Plum Creek Timber Company, Timberland Investment Management Organizations such as Hancock Timber Resource Group, Resource Management Services, Forest Investment Associates and The Campbell Group, and numerous other large and small privately held timber companies. In the Northern region, Weyerhaeuser, Hancock Timber Resource Group, Green Diamond Resource Company, Longview Timber LLC, The Campbell Group, Port Blakely Tree Farms, Pope Resources, the State of Washington Department of Natural Resources and the Bureau of Indian Affairs are significant competitors. Other competition in the Northern 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. Sateri Holdings announced in December 2010 plans to expand the capacity of its specialty cellulose fiber production line in Bahia, Brazil, by 85,000 metric tons to be completed in 2013. Buckeye Technologies announced in October 2011 a project to increase high-end specialty wood pulp capacity by 42,000 metric tons at its Perry, Florida operation to be completed in December 2012. The new market capacity is not expected to adversely affect the results of our Performance Fibers segment in 2012. However, it is difficult to determine how market dynamics may impact our business in 2013 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. Price is the principal method of competition.
Customers
In 2011, a group of customers under the common control of Eastman Chemical Company (and its affiliates), Celanese and Nantong Cellulose represented approximately 21 percent, 16 percent and 16 percent of our Performance Fibers segment’s sales, respectively, and 15 percent, 11 percent and 11 percent of consolidated sales, respectively. The loss of any of these customers could have a material adverse effect on the Company and the Performance Fibers segment’s results of operations.
Seasonality
Our Wood Products segment may experience higher seasonal demand in the second and third quarters when demand for new housing typically increases. Our Forest Resources, 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

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Condition and Results of Operations — Environmental Regulation, and Note 15Liabilities 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 Forest Resources segment at prevailing market prices.
Our Performance Fibers mills utilize a significant amount of chemicals, most of which are purchased under negotiated supply agreements with third parties.

Our Performance Fibers mills use a substantial amount of residual biomass to produce their own energy, but also require fuel oil and natural gas. These raw materials are subject to significant changes in prices and availability. 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, improving manufacturing efficiency and environmental controls, and reducing fossil fuel consumption.
The research and development activities of our timber operations include growth and yield modeling, 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 1,900 people, of whom approximately 1,800 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.
In March 2009, collective bargaining agreements covering approximately 700 hourly employees at our Jesup mill were extended through June 2012. We expect to begin contract negotiations with the Jesup mill's unions during the first half of 2012. While we expect to reach agreement with our Jesup unions on a new collective bargaining agreement, a failure to do so together with any significant labor disruption could have a material adverse affect on our operations and financial results.
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 markets we operate in are subject to factors beyond our control.
The end markets for our Forest Resources, 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 availability of capital, 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. 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 Forest Resources 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 industries in which we operate are highly competitive.
In our Performance Fibers business, we face competition from domestic and foreign producers. In addition, some manufacturers of pulp recently announced plans to convert facilities for, or claimed to have already commenced production of, high purity dissolving pulps that may compete with our products. Examples include mills in Washington and Canada. Competition also arises from the threat of substitute products.
In our Forest Resources business, competitive pressures are primarily driven by product supply and quality of the timber offered by competitors in the domestic and export markets, each of which may impact pricing.
With respect to our Real Estate business, we compete with other owners of entitled and unentitled properties. Each property has unique attributes, but overall supply and price for residential, commercial, industrial and rural properties in the geographic areas in which we operate are the most significant competitive drivers.
In Wood Products, significant competition arises from a variety of non-wood and engineered products, imported lumber (particularly from Canada) and competitive domestic producers.
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, at times, experienced 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 Forest Resources, 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 businesses, 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, the U.S. Environmental Protection Agency ("EPA") has 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 proposed regulations which significantly tighten emissions limits of certain air pollutants from industrial boilers. In addition, as a result of certain recent judicial rulings and EPA initiatives, including some that would require timberland operators to obtain permits to carry out certain ordinary course forestry activities, 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 Forest Resources 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 modify or 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.
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

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Southeast, are protected under the Federal Endangered Species Act or similar federal and 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 15Liabilities 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 entail a lengthy, uncertain and costly approval process.
Entitlement and development of real estate entail 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, in 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.
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.


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Index to Financial Statements

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 estate lending standards and availability, certainly had such an effect in 2011 and is expected to continue into 2012.
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 2012, 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.
Investment returns on pension assets may be lower than expected or interest rates may decline, 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 or what interest rates may be at any point in time, no assurances can be given that future plan contributions required by applicable law will not be material. See Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Use of Estimates 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,
 

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Index to Financial Statements

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 delayed or unsuccessful in completing our cellulose specialties expansion project.
In 2011, we announced a major expansion of our Jesup, Georgia facility, whereby we plan to increase our cellulose specialties production capacity by about 190,000 tons per year. We expect to complete construction of this project and also exit the absorbent materials (i.e., fluff pulp) business in 2013. In the event that completion of the project is significantly delayed or unsuccessful, we could suffer a material adverse effect on our business, results of operations and financial condition.
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 47 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. For example, as discussed in Item 1 - Business, our collective bargaining agreement at Jesup expires on June 30, 2012. 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.
A significant portion of the timberland that we own, lease or manage is concentrated in limited geographic areas.
We own, lease or manage approximately 2.7 million acres of timberland and real estate located primarily in the United States and New Zealand. Approximately 68 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,

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Index to Financial Statements

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, 2011, we had $847 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"), and related U.S. Treasury regulations and administrative guidance. 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 not be allowed a deduction for dividends paid to shareholders in computing our taxable income and we will be subject to federal income tax on our 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.
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, non-passive real estate activities including dealer sale of HBU property and other real estate and the sale of logs. Taxable REIT subsidiaries are subject to corporate-level income tax. Therefore, we pay income taxes on the income generated by our taxable REIT subsidiaries. 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.
Our status as a REIT may affect our ability to expand our taxable REIT subsidiaries' operations.
Taxable REIT subsidiaries are limited in size based upon a REIT's real estate assets. 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.
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.


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We may be limited in our ability to fund shareholder distributions using cash generated from our taxable REIT subsidiaries' operations.
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 a REIT's annual gross income must be derived from passive real estate rents, royalties and gains 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 passive 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 80 percent of our regular dividend distribution.
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 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.
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. 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. However, a REIT must pay corporate level tax on its undistributed capital gains.
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.
 
Item 1B.
UNRESOLVED STAFF COMMENTS
None.


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Item 2.
PROPERTIES
The following table details the significant properties we own, lease, or manage by reportable segment (acres in millions) at December 31, 2011:
 
Segment/Operations
Location
 
Total Acres
 
Fee-Owned Acres
 
Long-Term
Leased Acres
 
Managed Acres
Forest Resources
Atlantic
 
1.1

 
0.8

 
0.3

 

 
Gulf States
 
0.7

 
0.7

 

 

 
Northern
 
0.5

 
0.5

 

 

 
New Zealand (a)
 
0.3

 

 

 
0.3

 
Total Forest Resources Acres
 
2.6

 
2.0

 
0.3

 
0.3

Real Estate
U.S.
 
0.1

 
0.1

 

 

Total Forest Resources and Real Estate Acres
 
2.7

 
2.1

 
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
  
800,000 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, in which Rayonier has a 26 percent interest.
(b)
These locations also have a combined annual production capacity of approximately 700,000 short green tons of wood chips.
Our manufacturing facilities are maintained through ongoing capital investments, regular maintenance and equipment upgrades. During 2011, 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 soft 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 environmental issues, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of OperationsEnvironmental Regulation and Note 15Liabilities 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 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

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Index to Financial Statements

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 the fourth quarter of 2011, SWP reached separate settlements with the EPA and the Tennessee Department of Environmental Conservation ("TDEC"), respectively, to resolve the NOV. (TDEC elected to bifurcate alleged violations relating to SWP's Chattanooga, Tennessee site from the EPA NOV, which covered SWP sites in four other states.) Under the settlement, SWP paid penalties of $317,000 to the EPA and $99,000 to TDEC.

Item 4.
MINE SAFETY DISCLOSURES

Not applicable.

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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.
On July 22, 2011, the Board of Directors authorized a three-for-two stock split in the form of a stock dividend. The additional shares were distributed on August 24, 2011 to shareholders of record on August 10, 2011. The impact of the stock split is reflected for all periods presented in the following table.
 
 
High
 
Low
 
Dividends
2011
 
 
 
 
 
Fourth Quarter
$
45.28

 
$
34.68

 
$
0.40

Third Quarter
$
45.37

 
$
35.34

 
$
0.40

Second Quarter
$
44.88

 
$
39.64

 
$
0.36

First Quarter
$
41.81

 
$
35.28

 
$
0.36

2010
 
 
 
 
 
Fourth Quarter
$
36.35

 
$
32.13

 
$
0.36

Third Quarter
$
34.19

 
$
28.76

 
$
0.33

Second Quarter
$
33.81

 
$
27.71

 
$
0.33

First Quarter
$
30.94

 
$
26.47

 
$
0.33

For information about covenants of our credit facility that could restrict our ability to pay cash dividends in the future, see Note 11Debt — Debt Covenants.
On February 28, 2012, the Company announced a first quarter dividend of 40 cents per share payable March 30, 2012, to shareholders of record on March 16, 2012. There were approximately 8,305 shareholders of record of our Common Shares on February 22, 2012.
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, July 2003 and October 2011, our Board of Directors authorized the purchase of additional shares totaling 2.1 million. These shares were authorized separately from the anti-dilutive program, and do not have expiration dates. In 2011, there were no shares repurchased under these plans. As of December 31, 2011, there were 3,145,290 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 Financial Times Stock Exchange ("FTSE") National Association of Real Estate Investment Trusts ("NAREIT") All Equity REITs Index and the S&P 1500 Paper and Forest Products 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.


Copyright 2012 S&P, a division of The McGraw-Hill Companies Inc.

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

 
2006
 
2007
 
2008
 
2009
 
2010
 
2011
Rayonier Inc.
$
100

 
$
120

 
$
84

 
$
119

 
$
155

 
$
206

S&P 500®
$
100

 
$
105

 
$
66

 
$
84

 
$
97

 
$
99

FTSE NAREIT All Equity REITs
$
100

 
$
84

 
$
53

 
$
67

 
$
86

 
$
93

S&P© 1500 Paper & Forest Products Index
$
100

 
$
100

 
$
41

 
$
81

 
$
88

 
$
96


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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,
 
2011
 
2010
 
2009
 
2008
 
2007
 
(dollar amounts in millions, except per share data)
Profitability:
 
 
 
 
 
 
 
 
 
Sales
$
1,489

 
$
1,315

 
$
1,169

 
$
1,271

 
$
1,225

Operating income (a)
356

 
282

 
410

 
226

 
247

Net income (b)
276

 
218

 
313

 
149

 
174

Diluted earnings per common share (c)
2.20

 
1.79

 
2.60

 
1.25

 
1.47

Financial Condition:
 
 
 
 
 
 
 
 
 
Total assets
$
2,569

 
$
2,364

 
$
2,253

 
$
2,082

 
$
2,068

Total debt
847

 
768

 
700

 
747

 
721

Shareholders’ equity
1,323

 
1,252

 
1,146

 
939

 
1,000

Shareholders’ equity — per share (c)
10.84

 
10.34

 
9.61

 
7.94

 
8.52

Cash Flows:
 
 
 
 
 
 
 
 
 
Cash provided by operating activities (d)
$
432

 
$
495

 
$
307

 
$
340

 
$
324

Cash used for investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures
$
145

 
$
138

 
$
92

 
$
105

 
$
97

Purchase of timberlands, real estate and other
321

 
5

 

 
234

 
27

Jesup mill cellulose specialties expansion
43

 

 

 

 

Other
(20
)
 

 
1

 
(9
)
 
2

Total cash used for investing activities
$
489

 
$
143

 
$
93

 
$
330

 
$
126

Cash used for financing activities
215

 
78

 
202

 
128

 
58

Depreciation, depletion and amortization
136

 
143

 
158

 
168

 
165

Cash dividends paid
185

 
164

 
158

 
157

 
151

Non-GAAP Financial Measures:
 
 
 
 
 
 
 
 
 
EBITDA (e)
 
 
 
 
 
 
 
 
 
Forest Resources
$
110

 
$
92

 
$
77

 
$
116

 
$
146

Real Estate
59

 
75

 
80

 
101

 
98

Performance Fibers
354

 
272

 
242

 
205

 
209

Wood Products
1

 
5

 
(6
)
 
(2
)
 
(2
)
Other Operations
1

 
1

 
(3
)
 
3

 
(3
)
Corporate and other
(33
)
 
(20
)
 
178

 
(28
)
 
(36
)
Total EBITDA (a)
$
492

 
$
425

 
$
568

 
$
395

 
$
412

Debt to EBITDA
1.7 to 1

 
 1.8 to 1

 
1.2 to 1

 
1.9 to 1

 
1.8 to 1

Performance Ratios (%):
 
 
 
 
 
 
 
 
 
Operating income to sales
24

 
21

 
35

 
18

 
20

Return on equity (f)
21

 
18

 
30

 
15

 
18

Return on capital (f)
13

 
11

 
18

 
9

 
11

Debt to capital
39

 
38

 
38

 
44

 
42

Other:
 
 
 
 
 
 
 
 
 
Timberland and real estate acres — owned, leased, or managed, in millions of acres
2.7

 
2.4

 
2.5

 
2.6

 
2.5

Dividends paid — per share (c)
$
1.52

 
$
1.36

 
$
1.33

 
$
1.33

 
$
1.29


 

17

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Index to Financial Statements

 
For the Years Ended December 31,
 
2011
 
2010
 
2009
 
2008
 
2007
Selected Operating Data:
 
 
 
 
 
 
 
 
 
Forest Resources
 
 
 
 
 
 
 
 
 
Sales volume (thousands of short green tons)
 
 
 
 
 
 
 
 
 
Atlantic
3,406

 
3,571

 
4,532

 
4,452

 
3,325

Gulf States
1,335

 
1,359

 
1,726

 
2,167

 
2,749

Northern
1,665

 
1,369

 
1,402

 
1,971

 
2,059

Total
6,406

 
6,299

 
7,660

 
8,590

 
8,133

Real Estate—acres sold
 
 
 
 
 
 
 
 
 
Development
606

 
472

 
789

 
501

 
4,356

Rural
14,821

 
15,868

 
15,628

 
15,845

 
12,817

Non-Strategic Timberlands
12,191

 
44,556

 
53,703

 
49,801

 

Total Acres Sold
27,618

 
60,896

 
70,120

 
66,147

 
17,173

Performance Fibers
 
 
 
 
 
 
 
 
 
Sales volume (thousands of metric tons)
 
 
 
 
 
 
 
 
 
Cellulose specialties
504

 
480

 
464

 
471

 
467

Absorbent materials
227

 
238

 
270

 
253

 
259

Total
731

 
718

 
734

 
724

 
726

Wood Products
 
 
 
 
 
 
 
 
 
Lumber sales volume — in millions of board feet
264

 
243

 
224

 
321

 
329

____________________________________________________________________________________________________
(a)
The 2011 results included a $7 million increase in a disposition reserve. The 2010 results included a gain of $12 million from the sale of a portion of the Company's interest in its New Zealand JV. The 2009 results included income of $205 million related to the Alternative Fuel Mixture Credit ("AFMC"). The 2007 results included an $11 million loss from wildfires on timberlands in southeast Georgia and northeast Florida.
(b)
The 2011 results included a benefit of $16 million for the reversal of a reserve related to the taxability of the AFMC. The 2010 results included a tax benefit of $24 million for the Cellulosic Biofuel Producer Credit ("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 included income of $193 million related to the AFMC.
(c)
Reflects the August 24, 2011 three-for-two stock split.
(d)
The 2010 results included a cash refund from the Internal Revenue Service ("IRS") of $189 million related to the AFMC.
(e)
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.
(f)
Return on equity is calculated by dividing net income 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 net income 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)
 
 
 
Forest Resources
 
Real
Estate
 
Performance
Fibers
 
Wood
Products
 
Other
 
Corporate
and
other
 
Total
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) (a)
$
47

 
$
47

 
$
298

 
$
(2
)
 
$
1

 
$
(35
)
 
$
356

Add:
Depreciation, depletion and amortization
63

 
12

 
56

 
3

 

 
2

 
136

EBITDA
$
110

 
$
59

 
$
354

 
$
1

 
$
1

 
$
(33
)
 
$
492

2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (b)
$
33

 
$
53

 
$
214

 
$
2

 
$
1

 
$
(21
)
 
$
282

Add:
Depreciation, depletion and amortization
59

 
22

 
58

 
3

 

 
1

 
143

EBITDA
$
92

 
$
75

 
$
272

 
$
5

 
$
1

 
$
(20
)
 
$
425

2009
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) (c)
$
7

 
$
56

 
$
184

 
$
(11
)
 
$
(3
)
 
$
177

 
$
410

Add:
Depreciation, depletion and amortization
70

 
24

 
58

 
5

 

 
1

 
158

EBITDA
$
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

____________________________________________________________________________________________________
(a)
Corporate and other included a $7 million increase in a disposition reserve. See Note 15Liabilities for Dispositions and Discontinued Operations for additional information.
(b)
Corporate and other included a gain of $12 million from the sale of a portion of the Company's interest in its New Zealand JV. See Note 5Joint Venture Investment for additional information.
(c)
Corporate and other included $205 million related to the AFMC. See Note 8Income Taxes Alternative Fuel Mixture Credit("AFMC") and Cellulosic Biofuel Producer Credit ("CBPC") for additional information.

 


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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: Forest Resources, Real Estate and Performance Fibers. We own or lease (under long-term agreements) approximately 2.4 million acres of timberland and real estate in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, 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 and we are well underway with the cellulose specialties expansion at our Jesup, Georgia mill announced in 2011.
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 (Forest Resources 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 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 308,000 acres of timberland in 2011, 3,000 acres in 2010, none in 2009, and 110,000 acres in 2008. We sold approximately 12,000 and 45,000 acres of non-strategic timberland in 2011 and 2010, 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 2011, we entitled 29,400 acres in Florida and now have approximately 39,000 acres entitled in Florida and Georgia.
Maintain our global leadership in high purity cellulose specialties through investments to increase capacity, and improve product quality and technical expertise. In May 2011, our Board approved the CSE to convert a fiber line at our Jesup, Georgia mill from absorbent materials to cellulose specialties. The CSE will add approximately 190,000 metric tons of cellulose specialties capacity, bringing total cellulose specialties capacity to about 675,000 metric tons. Upon completion, we will no longer produce absorbent materials (about 260,000 metric ton capacity). With commitments for 85 percent of the new volume already in hand, we are close to being fully committed. We are on pace to complete the CSE project by mid-2013. This expansion will help differentiate our business as we will be able to increase our focus on high-end specialty pulp and development of products for customer specific applications while exiting the more commodity-like absorbent materials (fluff pulp) business.

We continuously evaluate our capital structure. Our year-end debt-to-capital ratio was 39 percent and our debt-to-EBITDA ratio was 1.7 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 maintained conservative leverage and believe in keeping ample liquidity and financial 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. In April 2011, we entered into a new revolving credit facility and in August 2011 we increased our borrowing capacity from $300 million to $450 million. We had $295 million of available borrowing capacity on the revolving credit facility as of December 31, 2011. This facility expires in April 2016.
We maintain four qualified defined benefit plans and one unfunded plan to provide benefits in excess of amounts allowable in qualified plans under current tax law. At December 31, 2011, our qualified plans were underfunded $86 million versus $18 million at December 31, 2010 primarily due to a decrease in the discount rate from 5.25 percent to 4.20 percent. Our unfunded plan's liabilities increased from $26 million at December 31, 2010 to $31 million at December 31, 2011, also due to the decline in the discount rate. Although we have no pension contribution requirements in 2012, we may make discretionary pension contributions in 2012.
Our strategic capital is expected to be allocated primarily to our Performance Fibers segment for the Jesup mill CSE and to

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the Forest Resources segment for timberland acquisitions. We have a $23 million note payable maturing in June 2012 which we expect to pay off with cash. We also have $300 million in Senior Exchangeable Notes due in October 2012 which we expect to refinance. In conjunction with strategic growth opportunities, we may incur additional debt that would cause us to exceed the debt-to-capital ratio mentioned above.
In 2011, our annual dividend was $1.52 per share, reflecting a third quarter increase in the quarterly dividend from $0.36 per share to $0.40 per share, adjusted for the three-for-two stock split effective August 2011. Our 2012 dividend payments are expected to total $197 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 to issue approximately $300 million of long-term debt early in 2012 to restore our revolving credit facility capacity to $450 million. We expect cash flow from operations and a portion of the new debt to adequately cover planned capital expenditures (including strategic outlays), interest expense and dividends in 2012.
Operational Strategies
Timber is sold primarily through an auction process, although it is also marketed through log supply agreements, particularly in the Northern region. We operate Forest Resources as a stand-alone business, requiring our Performance Fibers and lumber 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 Forest Resources and minimizing the possibility of our manufacturing facilities being subsidized with below market-cost wood. We focus on optimizing Forest Resources 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 certain holdings in the Southeast and currently have approximately 7,900 acres of entitled land in Georgia and 31,200 acres of entitled land in Florida. Additionally, in 2011 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 returning assets.
In Performance Fibers, the focus has been to improve our position as a premier supplier of cellulose specialties, which comprised 69 percent of our 2011 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 customer 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. These factors were major considerations in our decision to proceed with the CSE project and exit the fluff market.
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.
Our capital expenditures totaled $145 million in 2011, excluding strategic acquisitions and the CSE. For 2012, non-strategic capital expenditures are expected to range from $150 million to $155 million. This increase will be invested primarily in Performance Fibers on cost reduction and efficiency projects and in silvicultural investments in our newly acquired timberland. We expect 2012 spending on the CSE to range between $200 million and $210 million.
Industry and Market Conditions
In 2011, demand for pulpwood was strong in the Gulf States and Atlantic regions as new bioenergy demand came on-line, but the market was adversely impacted by an increased supply from drought conditions and low-priced salvage wood from wide-spread wildfires. Domestic demand for sawtimber remained weak due to a continuation of the depressed housing market. The exception to weak sawtimber markets was the Pacific Northwest region where log demand from China pushed pricing to historic highs during the second and third quarters. Pricing for export logs softened in the fourth quarter due to decreased Chinese demand. Following the planned decline in harvest level on our Northern region in 2009 and 2010, we increased harvest there in 2011 and plan to increase further in 2012. We expect 2012 timber demand and pricing to exceed 2011 levels as general economic conditions improve in the U.S. and Chinese demand returns later in the year.
In Real Estate, 2011 sales and operating income declined as planned lower non-strategic timberland sales volumes more than offset higher rural HBU and development HBU margins. This shift was expected as non-strategic inventories decreased. We expect the soft demand for development property to continue in the near term due to the weak housing market and overall economic

21

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climate.
In Performance Fibers, demand remains strong for our cellulose specialties fibers. Sales are typically made under multi-year contracts, which establish target volumes at the beginning of each 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 through 2013 to 2017 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.
Absorbent materials prices were strong in the first half of 2011, but subsequently decreased in the second half of 2011. We expect average 2012 prices to be below 2011. 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 land information 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 2011 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. In 2011, we acquired approximately 308,000 acres of timberland mainly located in the Gulf States region. The acquisition did not significantly impact 2011 depletion expense, but we anticipate 2012 depletion expense will increase by approximately $2 million due to a higher depletion rate.
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 2012, 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 (book value) is recoverable through future operations.
Environmental costs associated with dispositions and discontinued operations
At December 31, 2011, we had $91 million of accrued liabilities for environmental costs relating to past dispositions and

22

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Index to Financial Statements

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 assessment or remediation, changes in environmental remediation technology, additional discovery 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 2011 and 2010, we increased the liability by $7 million and $3 million, respectively. See Note 15Liabilities 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. All plans are currently closed to new participants. Pension expense for all plans was $11 million in 2011. 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 2011, a $26 million return was assumed based on an expected long-term rate of return of 8.5 percent. The actual return for 2011 was a gain of $9 million, or 3 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 2011. At the end of 2011, we reviewed this assumption for reasonableness and determined that the 2011 long-term rate of return assumption should remain at 8.5 percent. At December 31, 2011, our asset mix consisted of 64 percent equities, 33 percent bonds and three percent real estate. We do not expect this mix to change materially in the near future.
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 (AA rated), long-term corporate bond rates into their calculations. The discount rate decreased from 5.25 percent at December 31, 2010 to 4.20 percent at December 31, 2011.
The Company’s pension plans were underfunded by $117 million at December 31, 2011, a $73 million decrease in funding status from December 31, 2010 due primarily to the decreased discount rate. In 2011, we had no mandatory pension contributions and did not make discretionary contributions to our qualified pension plans. We made discretionary contributions of $50 million in 2010 and contributions of $10 million in 2009, of which $8 million was mandatory. 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 20Employee Benefit Plans for additional information.

We expect pension expense to be approximately $18 million in 2012, a $7 million increase from 2011, mainly due to an increase in the amortization of actuarial losses resulting from a decrease in the discount rate. 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
+ 1.2 million
 
+ 14.0 million
25 bp increase in discount rate
- 1.2 million
 
-13.3 million
25 bp decrease in long-term return on assets
+ 0.8 million
 
 
25 bp increase in long-term return on assets
- 0.8 million
 
 
Realizability of both recorded and unrecorded tax assets and tax liabilities
As a REIT, our Forest Resources operations are generally not subject to income taxation. As such, our income taxes can vary

23

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Index to Financial Statements

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. Therefore, 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 8Income Taxes for additional information on our unrecognized tax benefits.


24

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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)
2011
 
2010
 
2009
Sales
 
 
 
 
 
Forest Resources
 
 
 
 
 
Atlantic
$
71

 
$
72

 
$
72

Gulf States
31

 
29

 
29

Northern
102

 
67

 
50

New Zealand
11

 
9

 
8

Total Forest Resources
215

 
177

 
159

Real Estate
 
 
 
 
 
Development
4

 
3

 
3

Rural
33

 
28

 
32

Non-Strategic Timberlands
34

 
65

 
66

Total Real Estate
71

 
96

 
101

Performance Fibers
 
 
 
 
 
Cellulose specialties
824

 
686

 
658

Absorbent materials
196

 
195

 
181

Total Performance Fibers
1,020

 
881

 
839

Wood Products
68

 
68

 
51

Other Operations
122

 
102

 
38

Intersegment Eliminations
(7
)
 
(9
)
 
(19
)
Total Sales
$
1,489

 
$
1,315

 
$
1,169

Operating Income (Loss)
 
 
 
 
 
Forest Resources
$
47

 
$
33

 
$
7

Real Estate
47

 
53

 
56

Performance Fibers
298

 
214

 
184

Wood Products
(2
)
 
2

 
(11
)
Other Operations
1

 
1

 
(3
)
Corporate and other (a)
(35
)
 
(21
)
 
177

Operating Income
356

 
282

 
410

Interest Expense
(51
)
 
(50
)
 
(53
)
Interest/Other Income
1

 
1

 
2

Income Tax Expense (b)
(30
)
 
(15
)
 
(46
)
Net Income
$
276

 
$
218

 
$
313

(a)
The 2011 results included a $7 million increase in a disposition reserve. See Note 15Liabilities for Dispositions and Discontinued Operations for additional information. The 2010 results included a gain of $12 million from the sale of a portion of the Company's interest in its New Zealand JV. See Note 5Joint Venture Investment for additional information. The 2009 results included income of $205 million related to the AFMC. See Note 8Income Taxes for additional information.
(b)
The 2011 results included a benefit of $16 million from the reversal of a reserve related to the taxability of the AFMC. The 2010 results included a tax benefit of $24 million for the CBPC. The 2009 results included a tax expense of $12 million related to the AFMC. See Note 8Income Taxes for additional information.

25

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Results of Operations, 2011 versus 2010
Forest Resources
Effective first quarter 2011, we reorganized our United States timber operations from the Eastern and Western regions into the Atlantic (Florida and Georgia), Gulf States (Alabama, Arkansas, Louisiana, Mississippi, Oklahoma and Texas) and Northern (New York and Washington) regions. Additionally, we renamed the Timber segment, Forest Resources. All prior periods presented have been restated to conform to this new structure.
Sales (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/
Mix/Other
 
Atlantic
$
72

 
$

 
$
(1
)
 
$
71

Gulf States
29

 
1

 
1

 
31

Northern
67

 
25

 
10

 
102

New Zealand
9

 

 
2

 
11

Total Sales
$
177

 
$
26

 
$
12

 
$
215

 
Operating Income (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/
Mix
 
Cost/Other
 
Atlantic
$
17

 
$

 
$
(1
)
 
$
(5
)
 
$
11

Gulf States
9

 
1

 
(1
)
 
(7
)
 
2

Northern
7

 
25

 
6

 
(9
)
 
29

New Zealand/Other

 

 

 
5

 
5

Total Operating Income
$
33

 
$
26

 
$
4

 
$
(16
)
 
$
47

The Atlantic region's sales and operating income decreased from the prior year as volumes declined five percent reflecting lower sawlog demand and the region recognized $2 million of fire losses.
The Gulf States' sales increased while operating income declined from 2010 primarily due to a geographic mix shift from Alabama (which has lower cost timber) to Texas and Arkansas. Additionally, the markets softened as supply increased due to dry weather and forest fires. The Gulf States' results also reflect $1 million of fire losses.
In the Northern region, sales and operating income increased from the prior year primarily due to strong export demand from Asian markets. Price and volume increases of 25 percent and 22 percent, respectively, were partially offset by higher logging and transportation costs.
The New Zealand sales represent timberland management fees for services provided to the JV, Matariki Forestry Group ("Matariki"). The operating income primarily represents equity earnings related to the JV's activities which have increased from 2010 mainly due to higher export prices and the sale of carbon credits.
Real Estate
Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: development HBU, rural HBU 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.



26

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Index to Financial Statements

  
2010
 
Changes Attributable to:
 
2011
Sales (in millions)
Price
 
Volume/
Mix
 
Development
$
3

 
$
1

 
$

 
$
4

Rural
28

 
7

 
(2
)
 
33

Non-Strategic Timberlands
65

 
16

 
(47
)
 
34

Total Sales
$
96

 
$
24

 
$
(49
)
 
$
71

 
Operating Income (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/
Mix
 
Cost/Other
 
Total Operating Income
$
53

 
$
24

 
$
(29
)
 
$
(1
)
 
$
47

Full year sales and operating income were $25 million and $6 million below 2010, respectively, primarily reflecting 32,365, or 73 percent, fewer non-strategic timberland acres sold. This decline was partially offset by improved results in rural HBU sales. While rural HBU volumes declined by 1,047 acres, or seven percent, prices increased by 29 percent mainly due to site specific characteristics. Operating income in 2011 also benefited from a $6 million property tax settlement covering years 2005 through 2010; however, this benefit was offset by higher costs due to property mix.
Performance Fibers
Sales (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/
Mix
 
Cellulose specialties
$
686

 
$
105

 
$
33

 
$
824

Absorbent materials
195

 
10

 
(9
)
 
196

Total Sales
$
881

 
$
115

 
$
24

 
$
1,020

Cellulose specialties sales improved as prices and volumes increased 15 percent and five percent from the prior year, respectively, reflecting strong demand and a production shift from absorbent materials to cellulose specialties.
Absorbent materials sales were relatively consistent with 2010 as a six percent increase in prices, primarily from higher prices in the first half of the year, offset a five percent decline in sales volumes from the production shift previously discussed.
Operating Income (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/
Mix
 
Cost/Other
 
Total Operating Income
$
214

 
$
115

 
$
9

 
$
(40
)
 
$
298

In 2011, operating income improved from 2010 as increased cellulose specialties sales and absorbent materials prices more than offset higher input and transportation costs. The 2011 results were also negatively impacted by a $6 million write-off related to process equipment changes needed for the CSE project.
Wood Products
Sales (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume
 
Total Sales
$
68

 
$
(6
)
 
$
6

 
$
68

 
Operating Income (Loss) (in millions)
2010
 
Changes Attributable to:
 
2011
Price
 
Volume/Cost
 
Total Operating Income (Loss)
$
2

 
$
(6
)
 
$
2

 
$
(2
)
Sales in 2011 were consistent with the prior year while operating income decreased reflecting an eight percent decline in price due to weak market conditions, partially offset by an eight percent increase in sales volumes mainly due to higher production. Our

27

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Index to Financial Statements

sawmills continue to produce at a reduced capacity due to a weak housing market.
Other Operations
Sales improved from 2010 primarily due to higher export demand; however, operating income was consistent with the prior year reflecting low margins.
Corporate and Other Expense/Eliminations
The 2011 results include a $7 million increase in a disposition reserve. See Note 15Liabilities for Dispositions and Discontinued Operations for additional information. 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 5 Joint Venture Investment for additional information. Excluding these special items, corporate and other expenses were $4 million below the prior year as 2010 included a $3 million accrual for closed facilities.
Interest Expense and Interest/Other Income
Interest expense and interest/other income were comparable to the prior year.
Income Tax Expense
The full year effective tax rate was 9.9 percent compared to 6.5 percent in 2010. Excluding non-routine items, the effective tax rate was 24.6 percent, up from 18.2 percent in 2010. The higher rate in 2011 was due to proportionately higher earnings from the TRS. See Note 8Income Taxes for additional information regarding the provision for income taxes and the non-routine tax items.
Outlook for 2012
We expect strong performance in 2012. In Forest Resources, we will continue integrating our newly acquired Southeastern timberlands and plan to increase harvest volumes in the Northwest to continue taking advantage of Asian export markets. We anticipate another record year in Performance Fibers, with average price increases of 12 to 13 percent for our high purity cellulose specialties products offsetting expected weakness in absorbent materials pricing and higher input costs. Overall, we expect operating income to increase about 10 percent over 2011. However, we anticipate EPS and Cash Available for Distribution to be comparable to 2011 due to an increase in the effective tax rate, which is anticipated to range from 24 to 26 percent in 2012, as we do not expect the same level of non-routine tax benefits.
Our 2012 outlook is subject to a number of variables and uncertainties, including those discussed at Item 1A — Risk Factors.
Results of Operations, 2010 versus 2009
Forest Resources
Sales (in millions)
2009
 
Changes Attributable to:
 
2010
Price
 
Volume/
Mix/Other
 
Atlantic
$
72

 
$
8

 
$
(8
)
 
$
72

Gulf States
29

 
6

 
(6
)
 
29

Northern
50

 
18

 
(1
)
 
67

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
 
Atlantic
$
14

 
$
8

 
$
(4
)
 
$
(1
)
 
$
17

Gulf States
4

 
6

 
(1
)
 

 
9

Northern
(8
)
 
18

 
(1
)
 
(2
)
 
7

New Zealand/Other
(3
)
 

 

 
3

 

Total Operating Income
$
7

 
$
32

 
$
(6
)
 
$

 
$
33


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Index to Financial Statements

In the Atlantic and Gulf States regions, 2010 sales were comparable to prior year as higher prices mainly due to weather-related supply constraints were offset by lower volumes as thinnings returned to more normalized levels. Average prices rose approximately $4.00 per short green ton, or approximately 25 percent, for the year, while volumes declined 21 percent. Operating income improved from 2009 due to higher margins.
In the Northern region, sales and operating income improved from prior year periods primarily due to higher prices driven largely by stronger export demand. The 38 percent average price improvement was somewhat offset by a two percent decline in volumes as well as increased costs, mainly for road maintenance.
In February 2010, our New Zealand JV 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
  
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

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 average price increase of $215 per acre, or 17 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 four 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



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Index to Financial Statements

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 (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 nine 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.
Corporate and Other Expense/Eliminations
The 2010 results included 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 5Joint Venture Investment for additional information. The 2009 results included $205 million relating to the AFMC. See Note 8Income Taxes 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 included 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 Forest Resources segment to our Performance Fibers segment.
Interest and Other Income/Expense
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. Excluding non-routine items the effective tax rate was 18.2 percent, down from 22.0 percent in 2009. The lower rate in 2010 was due to proportionately higher earnings from the REIT. See Note 8Income Taxes for additional information regarding the provision for income taxes and the non-routine tax items.

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.

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Index to Financial Statements


Summary of Liquidity and Financing Commitments (in millions of dollars)
 
As of December 31,
 
2011
 
2010
 
2009
Cash and cash equivalents
$
79

 
$
349

 
$
75

Total debt
847

 
768

 
700

Shareholders’ equity
1,323

 
1,252

 
1,146

Total capitalization (total debt plus equity)
2,170

 
2,020

 
1,846

Debt to capital ratio
39
%
 
38
%
 
38
%
 
Our 2011 debt-to-capital ratio increased slightly from 2010 primarily due to the debt assumed in the 2011 timberland acquisition. See Note 6Timberland Acquisitions and Note 11 Debt for further information on our acquisitions and borrowings.
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):
 
2011
 
2010
 
2009
Total cash provided by (used for):
 
 
 
 
 
Operating activities
$
432

 
$
495

 
$
307

Investing activities
(489
)
 
(143
)
 
(93
)
Financing activities
(215
)
 
(78
)
 
(202
)
Effect of exchange rate changes on cash
1

 

 
1

Decrease (increase) in cash and cash equivalents
$
(271
)
 
$
274

 
$
13

Cash Provided by Operating Activities
Cash provided by operating activities in 2011 decreased from the prior year as 2010 included a $189 million refund related to the AFMC. Excluding the impact of this receipt, cash provided by operating activities increased $126 million primarily due to higher earnings in our Performance Fibers segment and a $50 million decrease in pension contributions.
Cash provided by operating activities in 2010 increased from 2009 as higher Forest Resources and Performance Fibers earnings and a cash refund related to the AFMC were partially offset by a $42 million increase in 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 Used for Investing Activities
Cash used for investing activities in 2011 rose from 2010 primarily due to an increase in strategic capital which included $321 million for timberland acquisitions and $43 million for the Jesup mill CSE. This was partially offset by changes in restricted cash due to the timing of like-kind exchange transactions.
Cash used for investing activities in 2010 rose from the prior year 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 Financing Activities
Cash used for financing activities in 2011 increased from 2010 as 2011 included net debt repayments of $39 million, while 2010 included net borrowings of $60 million. Additionally, dividends paid increased $22 million as dividends per share rose 12 percent over the 2010 amount and proceeds on stock options exercised decreased $13 million.
Cash used for financing activities in 2010 decreased from 2009 as 2010 included net borrowings of $60 million. 2009 included $40 million in net debt repayments, as well as costs related to the August 2009 issuance of Senior Exchangeable Notes due 2015. Additionally, cash proceeds on stock options exercised were $15 million higher in 2010.


31

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Expected 2012 Expenditures
Capital expenditures in 2012 are forecasted to be between $150 million and $155 million, excluding strategic acquisitions and the CSE. We expect 2012 spending on the CSE to range between $200 million and $210 million. Our 2012 dividend payments are expected to increase from $185 million to $197 million assuming no change in the quarterly dividend rate of $0.40 per share. We have a $23 million note payable which matures June 2012 and $300 million in Senior Exchangeable Notes due October 2012. We expect to refinance the Senior Exchangeable Notes and may incur additional debt in conjunction with strategic growth opportunities.
In 2011, we made no discretionary pension contributions compared to discretionary contributions of $50 million in 2010. We have no mandatory pension contributions in 2012 but may make discretionary contributions. Cash payments for income taxes in 2012 are anticipated to be between $55 million and $60 million. Expenditures of $10 million for environmental costs related to our dispositions and discontinued operations are expected in 2012. See Note 15Liabilities for Dispositions and Discontinued Operations for further information.

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):
 
2011
 
2010
 
2009
 
2008
 
2007
Net Income to EBITDA Reconciliation
 
 
 
 
 
 
 
 
 
Net Income
$
276

 
$
218

 
$
313

 
$
149

 
$
174

Income tax expense
30

 
15

 
46

 
29

 
23

Interest, net
50

 
49

 
51

 
49

 
50

Depreciation, depletion and amortization
136

 
143

 
158

 
168

 
165

EBITDA (a)
$
492

 
$
425

 
$
568

 
$
395

 
$
412

 
2011
 
2010
 
2009
 
2008