Rayonier - 10-Q quarterly report FY

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

As of April 30, 2002, there were outstanding 27,718,065 Common Shares of the Registrant.

The unaudited financial statements reflect, in the opinion of Rayonier Inc. and subsidiaries (Rayonier or the Company), all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results of operations, the financial position and the cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of certain estimates by management (e.g., useful economic lives of assets) in determining the amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. There are risks inherent in estimating, and therefore, actual results could differ from those estimates. For a full description of accounting policies, please refer to the Notes to Consolidated Financial Statements in the 2001 Annual Report on Form 10-K.

Certain items in prior year’s consolidated financial statements have been reclassified to conform to the current year presentation.

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

An analysis of shareholders’ equity for the three months ended March 31, 2002, and the year ended December 31, 2001, follows (share amounts actual):

Total assets by segment were as follows:

See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for information about segment sales and operating income.

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

In our New Zealand timber operations and at our New Zealand medium density fiberboard (“MDF”) manufacturing facility, normal operating expenses include contractor and license fees, care and maintenance of timberlands, salaries and wages, wood purchases and other production costs incurred in manufacturing MDF. Rayonier hedges US/New Zealand dollar currency rate-risk with respect to these New Zealand dollar operating expenditures (cash flow hedging).

In the Company’s Statement of Consolidated Income for the three months ended March 31, 2002, a gain of approximately $0.1 million was recorded on foreign currency contracts reflecting primarily realized gains on contracts that matured, plus the time value changes for outstanding contracts. The Company recorded an after-tax gain of approximately $0.3 million in “Accumulated other comprehensive income (loss) (AOCI)” in the Consolidated Balance Sheet as of March 31, 2002. When the forecasted transaction comes to fruition and is recorded, the amounts in AOCI are reclassified to the Statements of Consolidated Income. We expect to reclassify this amount into earnings during the next ten months.

At March 31, 2002, the Company held foreign currency forward contracts maturing through January 2003 totaling $11.6 million (nominal value). The largest amount of contracts outstanding during the first three months of 2002 totaled $13.1 million (nominal value).

On March 13, 2002, the Company entered into an interest rate swap on $50 million of 6.15% fixed rate notes payable maturing in February 2004. The swap converts the notional amount from fixed rates to floating rates and matures in February 2004. The interest rate swap qualifies as a fair value hedge under Statements of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. As such, the net effect from the interest rate swap is recorded as part of interest expense and was less than $0.1 million for the three months ended March 31, 2002. Based upon the current interest rates for similar transactions, the fair value of the interest rate swap agreement resulted in a liability of approximately $0.1 million and a decrease in debt of approximately $0.1 million at March 31, 2002.

During the first quarter of 2002, the Company received an unsolicited offer from a third party to purchase its timber operations located in New Zealand’s East Coast region for $63.5 million. All of Rayonier’s timberlands in the region, which are leased timberlands, are included in the offer, as well as all employees, capitalized improvements, business contracts, office and vehicle leases, miscellaneous assets and forestry data. The Company and the buyer signed a conditional purchase agreement on March 28, 2002, and the transaction is expected to close in the second quarter of 2002. While for accounting purposes there will be a pre-tax gain on sale in New Zealand, due to historical exchange rate treatment of the cost basis, an after-tax U.S. dollar loss of approximately 5 cents per share will be incurred from the transaction in this fiscal year based on a $0.44 U.S./NZ exchange rate. Cash proceeds from the transaction including interest in 2002 are anticipated to be approximately $65 million.

The preparation of Rayonier’s financial statements requires estimates, assumptions and judgements that affect the Company’s assets, liabilities, revenues and expenses. The Company bases these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information it believes are reasonable. Actual results may differ from these estimates under different conditions. For a full description of the Company’s critical accounting policies, see the Management Discussion and Analysis in the 2001 Annual Report on Form 10-K.

Rayonier operates in three reportable segments: Performance Fibers, Timber and Land (previously titled Timberland Management), and Wood Products and Trading. Performance Fibers includes two business units, Cellulose Specialties and Absorbent Materials. The Timber and Land segment includes two business units, Timber and Land.

The amounts and relative contributions to sales and operating income (loss) attributable to each of Rayonier’s reportable business segments were as follows (thousands of dollars):

Operating income (loss) as stated in the preceding tables and as presented in the Statements of Consolidated Income is equal to Segment income (loss). The income (loss) items below “Operating income” in the Statements of Consolidated Income are not allocated to segments. These items, which include interest (expense) income, miscellaneous income (expense) and income tax (expense) benefit, are not considered by Company management to be part of segment operations.

Sales for the first quarter of 2002 of $276 million were essentially equal to prior year first quarter sales. Lower absorbent materials prices, softer timber volume and prices, and weaker trading activity were offset by higher land sales and stronger lumber volume and prices. Operating income for the first quarter was $28 million, $10 million below prior year principally due to lower absorbent materials prices, and lower timber volume and prices. These unfavorable variances were partially offset by the favorable impact of higher land sales and lumber prices, along with lower lumber and Performance Fibers manufacturing costs.

Sales for the first quarter of 2002 were $129 million, $10 million lower than prior year first quarter, primarily due to lower absorbent materials prices. Operating income for the three months ended March 31, 2002, of $7 million was $8 million lower compared to the prior year period. The decline in operating income was primarily due to a 20 percent decline in average fluff pulp prices (the major component of the absorbent materials business) partially offset by lower manufacturing costs.

Sales of $63 million were essentially equal compared to first quarter 2001 while operating income of $29 million was $7 million below prior year first quarter. The decrease in operating income was primarily due to lower timber volume and prices, partly offset by higher land sales.

Sales for the first quarter of 2002 were $89 million compared to $84 million in the first quarter of 2001. The operating loss of $2 million for the first quarter of 2002 compared favorably to $6 million in losses in the prior year’s first quarter. Sales increased due to higher lumber volume and prices partly offset by lower trading activity. The operating loss was lower due to higher lumber prices and lower manufacturing costs.

Corporate and other expenses for the first quarter of 2002 were $6 million compared to $7 million in the first quarter of 2001. The improvement resulted from the favorable impact of New Zealand foreign exchange rates and lower intersegment eliminations partly offset by higher stock price-based incentive compensation.

Interest expense for the first quarter of 2002 was $15 million, a decrease of $4 million from the first quarter of 2001 primarily due to lower debt and interest rates.

Miscellaneous income (expense) for the first quarter of 2002 was income of $0.4 million compared to expense of $0.5 million in the prior year’s quarter. The improvement was due to approximately $0.9 million of higher expense in 2001 primarily from the mark to market remeasurement of New Zealand forward currency contracts. These contracts have been designated as cash flow hedges and gains or losses are recorded in AOCI until maturity. The net impact of New Zealand forward currency contracts that have matured in the first quarter of 2002 resulted in a gain of approximately $0.1 million.

The effective tax rate for the first quarter of 2002 was 29.5 percent compared to an effective tax rate of 33.6 percent for the prior year’s quarter. The Company’s effective tax rate continues to be below the U.S. statutory levels due to lower rates in effect for foreign subsidiaries, foreign exchange tax-related benefits and the impact of various tax credits.

Net income for the first quarter of 2002 was $9 million, or $0.33 per diluted common share, compared to $12 million, or $0.45 per diluted common share, for the prior year first quarter. The decrease is primarily due to lower absorbent materials prices, and lower timber volume and prices. These unfavorable variances were partially offset by higher land sales and lumber prices, lower lumber and performance fibers manufacturing costs, lower interest expense and improved non-operating income principally due to a loss on the remeasurement of New Zealand dollar forward currency contracts in the prior year first quarter.

Second quarter 2002 earnings are expected to be above first quarter 2002 earnings due to higher anticipated land sales, continued strength in the cellulose specialties business of the performance fibers segment, and seasonal price increases in lumber. Second quarter 2002 earnings are also expected to be higher than second quarter 2001 if the major land sale in 2001, which generated earnings of $0.75 per share, is excluded for comparative purposes.

Cash flow provided by operating activities of $60 million for the first quarter of 2002 was comparable to the prior year quarter. Cash provided by operating activities financed capital expenditures of $16 million, dividends of $10 million and debt reduction of $35 million. Cash flow used for financing activities for the first quarter 2002, was $45 million in paid down capital (debt and equity) offset by $10 million in new capital from the exercise of stock options. This reflected a decrease of $2 million from prior year first quarter, due to an increase in the issuance of common shares, partly offset by higher net debt repayments in 2002. The Company did not repurchase any of its common shares during the quarter ended March 31, 2002, or March 31, 2001.

At March 31, 2002, debt was $815 million, a reduction of $35 million from December 31, 2001, and the debt-to-capital ratio was 53.1 percent compared to 54.5 percent at December 31, 2001. Net Debt (debt net of cash invested) was $794 million at quarter end, giving a net debt to capital ratio of 52.5 percent.

As of March 31, 2002, Rayonier had $300 million available under its revolving credit facilities. In conjunction with the Company’s long-term debt, certain covenant restrictions are required on the ratio of EBITDA (defined as earnings from continuing operations before significant non-recurring items, provision for dispositions, interest expense, income taxes, depreciation, depletion, amortization and the non-cash cost of land sales) to interest expense and EBITDA to total debt. In addition, there are covenant requirements on the ratios of consolidated cash flow available for fixed charges to total debt. The covenants listed above are calculated on a trailing 12-month basis.

The most restrictive long-term debt covenants in effect for Rayonier as of March 31, 2002, were as follows:

In addition to the covenants listed above, the revolving credit agreements include customary covenants that limit the incurrence of debt, the disposition of assets and the making of restricted payments between RTOC and Rayonier. The Company is currently in compliance with all of these covenants.

The Company has on file with the Securities and Exchange Commission shelf registration statements to offer $150 million of new public debt securities. The Company believes that internally generated funds, combined with available external financing, will enable Rayonier to fund capital expenditures, share repurchases, working capital and other liquidity needs for the foreseeable future.

No material changes in guarantees or financial instruments such as letters of credit and surety bonds occurred in the first quarter of 2002.

The discussion below is presented to enhance the reader’s understanding of Rayonier’s ability to generate cash, its liquidity and its ability to satisfy rating agency and creditor requirements. This information includes two measures of financial results: EBITDA and Free Cash Flow. These two measures are not defined by Generally Accepted Accounting Principles (GAAP). The discussion of EBITDA and Free Cash Flow is not intended to conflict with or change any of the GAAP disclosures described above, but to provide supplementary information that management deems to be relevant to analysts, investors and creditors. EBITDA and Free Cash Flow as defined may not be comparable to similarly titled measures reported by other companies.

EBITDA for the first quarter of 2002 was $75 million, $3 million lower than the prior year first quarter. The decrease in EBITDA was primarily due to lower absorbent materials and timber prices partly offset by higher land sales and lumber prices, and lower lumber and performance fibers manufacturing costs.

Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions except per share amounts):

Free cash flow (defined as EBITDA plus or minus significant non-recurring items, changes in working capital and long-term assets and liabilities (excluding the non-cash costs of land sales), less income taxes, interest expense, custodial capital spending and prior-year dividend levels) decreased $6 million, to $27 million for the first three months of 2002 primarily due to higher working capital requirements, changes in deferred taxes and higher cash balances, partly offset by higher other liabilities and income.

Below is a reconciliation of Cash Provided by Operating Activities to Free Cash Flow for the respective periods (in millions except per share amounts):

The Company is exposed to various market risks, including changes in commodity prices, foreign exchange rates and interest rates. The Company’s objective is to minimize the economic impact of these market risks. Derivatives are used, as noted above, in accordance with policies and procedures approved by the Board of Directors and are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into financial instruments for trading purposes. See also Note 5, “Financial Instruments” included in this Form 10-Q.

The fair market value of long-term fixed interest rate debt is subject to interest rate risk; however, Rayonier intends to hold most of its debt until maturity. During the first quarter of 2002, the Company entered into an interest rate swap in order to achieve a desired position of fixed and floating interest rates in its portfolio. Occasionally, callable bonds will be refinanced at the Company’s option if favorable economic conditions exist. Generally, the fair market value of fixed-interest-rate debt will increase as interest rates fall and decrease as interest rates rise.

Circumstances surrounding the Company’s exchange rate risk, commodity price risk and interest rate risk remain unchanged from December 31, 2001. For a full description of the Company’s market risk, please refer to Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations, in the 2001 Annual Report on Form 10-K.

(a)    See Exhibit Index

(b)    Rayonier, Inc. filed a report on Form 8-K dated February 27, 2002, that incorporates a news release issued by Standard and Poor’s on February 21, 2002, which revises its outlook on the Company from negative to stable based on Rayonier’s improved credit measures.

(c)    Rayonier, Inc. filed a report on Form 8-K dated March 18, 2002, to announce the rescission of Arthur Andersen’s appointment as independent auditors for 2002.

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