Rayonier - 10-Q quarterly report FY

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

COMMISSION FILE NUMBER 1-6780

RAYONIER INC.

Incorporated in the State of North Carolina
I.R.S. Employer Identification Number 13-2607329

50 North Laura Street, Jacksonville, FL 32202
(Principal Executive Office)

Telephone Number: (904) 357-9100

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

As of November 8, 2002, there were outstanding 27,717,242 Common Shares of the Registrant.

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RAYONIER INC.
FORM 10-Q
SEPTEMBER 30, 2002

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PART I.      FINANCIAL INFORMATION

Item I.      Condensed Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)
(Thousands of dollars, except per share data)

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

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RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Thousands of dollars)

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

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RAYONIER INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Thousands of dollars)

The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these consolidated statements.

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands unless otherwise stated)

1.       BASIS OF PRESENTATION

2.       EARNINGS PER COMMON SHARE

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands unless otherwise stated)

3.      SHAREHOLDERS’ EQUITY

4.      SEGMENT INFORMATION

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

5.      DISCONTINUED OPERATIONS

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands unless otherwise stated)

6.       FINANCIAL INSTRUMENTS

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands unless otherwise stated)

7.       LEGAL PROCEEDINGS

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Segment Information

Rayonier operates in three reportable segments: Performance Fibers, Timber and Land, 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 Condensed Statements of Consolidated Income is equal to Segment income (loss). The income (loss) items below “Operating income” in the Condensed 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.

Results of Operations

Sales and Operating Income

Sales and operating income for the third quarter of 2002 of $293 million and $35 million were $29 and $13 million, respectively, above the comparable period in the prior year. The sales increase was primarily due to higher land sales and improved trading activity, partly offset by lower performance fibers and lumber prices. Operating income improved mainly due to higher land sales and lower performance fibers manufacturing costs, partly offset by weaker performance fibers and lumber prices.

Sales and operating income of $831 million and $102 million for the nine months ended September 30, 2002 were $39 million and $22 million, respectively, below the same period in the prior year. Sales decreased due to lower performance fibers volume and

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prices, and reduced Southeast U.S. timber volume and land sales. This was partly offset by increased lumber volume and trading activity. Operating income was lower due to weaker performance fibers prices, U.S. timber prices and Southeast U.S. timber volume, partly offset by favorable performance fibers and lumber manufacturing costs.

Performance Fibers

Sales for the third quarter of 2002 were $139 million, $2 million above the prior year third quarter due to higher volumes, partly offset by lower prices. Operating income for the third quarter of 2002 of $11 million was $6 million above the prior year third quarter due to reduced manufacturing costs, partly offset by lower prices. Fluff pulp prices during the third quarter of 2002 were 4 percent below the third quarter of 2001.

Sales for the nine months ended September 30, 2002, were $392 million, $29 million below the same period in the prior year due to lower volumes and absorbent material prices. Operating income for the nine months ended September 30, 2002, was $28 million, $4 million below the same period in the prior year due to lower absorbent materials prices, partly offset by favorable manufacturing costs.

Timber and Land

Sales of $64 million and operating income of $33 million for the third quarter of 2002 were $18 million and $11 million above the prior year third quarter, respectively, due to higher land sales, partly offset by lower timber sales volume.

Sales and operating income of $183 million and $94 million for the nine months ended September 30, 2002, were $34 million and $20 million, respectively, below the same period in the prior year. These decreases were principally due to lower Southeast U.S. timber volumes and land sales and weaker U.S. timber prices.

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Wood Products and Trading

Sales for the third quarter of 2002 were $91 million compared to $83 million in the prior year third quarter. The operating results for the third quarter of 2002 were a loss of $5 million, compared with a loss of $2 million in the prior year third quarter. Despite improved sales, the operating loss increased as higher trading activity was more than offset by lower lumber prices. The enactment of a countervailing and anti-dumping duty on Canadian imports in the second quarter of 2002 has not resulted in a decline in Canadian lumber imports and U.S. lumber prices continue to be adversely impacted. The Company does not expect any significant, near-term improvement in lumber markets and profitability.

Sales for the nine months ended September 30, 2002, of $264 million were $22 million above the same period in the prior year. The increase was due to a 27 percent increase in lumber volume and higher trading activity, partly offset by a 4 percent decrease in lumber prices. The operating loss of $7 million for the nine months ended September 30, 2002, was a $1 million improvement over the loss in the same period in the prior year. This was due to lower lumber manufacturing costs and improved trading margins partly offset by lower lumber prices.

Corporate and Other

Corporate and Other expenses of $3 million for the third quarter of 2002 were slightly above the third quarter of 2001 due to the unfavorable impact of balance sheet related foreign exchange translation. Corporate and Other expenses for the nine months ended September 30, 2002, were $12 million, $2 million below the same period in the prior year. The decrease primarily resulted from the favorable impact of balance sheet related foreign exchange translation partly offset by higher stock-price based incentive compensation.

Other Income / Expense

Interest expense for the third quarter of 2002 was $14 million, a decrease of $2 million from the prior year third quarter mainly due to lower debt. Interest expense for the nine months ended September 30, 2002, was $45 million compared to $53 million for the same period in the prior year due to lower debt and slightly lower rates.

The effective tax rate for the third quarter of 2002 was 29.1 percent compared to 5.5 percent for the prior year third quarter, which was unusually low primarily due to the positive catch-up effect of re-estimating the annual effective tax rate at that time. The effective tax rate for the nine months ended September 30, 2002, was 28.4 percent compared to 31.1 percent for the same period in the prior year. During the third quarter and the nine months ended September 30, 2002, the Company’s effective tax rate continued to be below the U.S. statutory levels primarily due to lower taxes on foreign operations and research and development tax credits.

The following table reconciles the Company’s income tax provision at the U.S. statutory tax rate to the reported provision and effective tax rate for the first nine months of 2002 and 2001 (in millions):

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Income from Continuing Operations

Income from continuing operations for the third quarter of 2002 was $15 million, or $0.55 per diluted common share, compared to $6 million, or $0.22 per diluted common share, for the prior year third quarter. The increase is primarily due to higher land sales, reduced performance fibers manufacturing costs and interest expense, partly offset by lower lumber and performance fibers prices. Income from continuing operations of $42 million, or $1.49 per diluted common share, for the nine months ended September 30, 2002, was $8 million, or $0.31 per share, below the same period in the prior year. The decrease was due to lower performance fibers and timber prices, and reduced timber harvest volume, partly offset by a decline in interest expense.

Income (loss) from Discontinued Operations

The Company had income of $0.2 million or $0.01 per share from discontinued operations in the third quarter of 2002, due to post-closing adjustments related to the second quarter sale of the New Zealand East Coast timber operations. For the nine months ended September 30, 2002, the loss from discontinued operations was $0.8 million or $0.03 per share.

Other Items

The Company expects fourth quarter 2002 earnings to be lower than third quarter primarily due to the timing of land sales and higher chemical, fuel and other manufacturing costs in our performance fibers segment.

Liquidity and Capital Resources

Cash Flow

Cash flow provided by operating activities from continuing operations of $202 million for the nine months ended September 30, 2002, was $11 million below the same period in the prior year, primarily due to lower income and higher working capital requirements. Cash provided by operating activities from continuing operations for the nine months ended September 30, 2002, financed almost all of the Company’s capital expenditures of $57 million, dividends of $30 million and debt payments of $123 million (net). Cash flow used for financing activities for the nine months ended September 30, 2002, was slightly less than the prior year period as a result of additional new capital from the exercise of stock options, partly offset by higher debt repayments (net) and share repurchases. The Company repurchased 70,000 of its common shares during the nine months ended September 30, 2002, for $3 million compared to 52,900 shares repurchased for $2 million in the first nine months of 2001. Cash from discontinued operations provided an additional $24 million during the first nine months of 2002 versus $3 million from the same period in the prior year. On September 30, 2002, the Company had cash investments of $35 million, an increase of $28 million from year-end. The cash investments consisted of marketable securities with maturities at date of acquisition of 90 days or less.

On October 23, 2002, the purchaser (Huaguang Forests Co. Limited of China, “Huaguang”) of the New Zealand East Coast timber operations prepaid the outstanding $46.5 million note receivable.

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. EBITDA is 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. Free Cash Flow is defined as cash provided by operating activities of continuing operations less net custodial capital spending, dividends at prior year level and the tax benefit on the exercise of stock options. This definition has been modified from prior periods to exclude the change in cash and cash equivalents. 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 third quarter of 2002 was $81 million, $20 million above the prior year third quarter. The increase was primarily due to higher land sales and lower performance fibers manufacturing costs. EBITDA for the nine months ended September 30, 2002, was $232 million, $36 million below the same period in the prior year primarily due to lower land sales, a decline in performance fibers prices and a decrease in U.S. timber volume and prices, partly offset by a reduction in performance fibers manufacturing costs.

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

Free Cash Flow for the nine months ended September 30, 2002, was $120 million, $18 million below the same period in the prior year. The decrease resulted from lower income and higher working capital requirements.

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

Debt

At September 30, 2002, debt was $729 million, representing a reduction of $121 million from December 31, 2001. The debt-to-capital ratio was 49.7 percent compared with 54.5 percent at December 31, 2001, while net debt, defined as debt less cash invested, of $694 million at September 30, 2002, resulted in a net debt-to-capital ratio of 48.5 percent. Although net debt is not a measure defined by GAAP, it is provided as supplementary information relevant to analysts, investors and creditors.

On October 15, 2002, the Company paid off the remaining $78 million of outstanding 7.5% notes utilizing $63 million in available cash and $15 million from its credit lines. The $78 million was recorded in “Bank loans and current maturities” in the September 30, 2002, Condensed Consolidated Balance Sheet. The Company subsequently repaid the $15 million in short-term credit line borrowings. At September 30, 2002, Rayonier had $275 million available under its committed revolving credit facilities. The Company plans to reduce its revolving credit facilities from $300 million to $245 million effective November 18, 2002.

In conjunction with the Company’s long-term debt, certain covenant restrictions are required on the ratio of EBITDA to interest expense and EBITDA to total debt. In addition, there are covenant requirements in effect for Rayonier Timberlands Operating Company, L.P. (“RTOC”) on the ratio of cash flow available for fixed charges to fixed charges and the ratio of debt to cash flow available for fixed charges. The covenants listed below are calculated on a trailing 12-month basis.

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The most restrictive long-term debt covenants in effect for Rayonier as of September 30, 2002, were as follows:

In addition to the covenants listed above, the credit agreements include customary covenants that limit the incurrence of debt, the disposition of assets and the making of certain 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.

During the second quarter of 2002, the Company guaranteed five years of Crown forest timberland lease obligations estimated at $1.2 million per year in conjunction with the sale of its New Zealand East Coast operations. See Note 5 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements for additional information regarding the guarantee. No other material changes in guarantees or financial instruments such as letters of credit and surety bonds occurred during the first nine months of 2002.

New Accounting Standards

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement nullifies Emerging Issues Task Force No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company will adopt the standard effective January 1, 2003.

PART I.      FINANCIAL INFORMATION

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk

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 in accordance with policies and procedures approved by the Finance Committee of the Board of Directors and are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. The Company does not enter into financial instruments for trading purposes. See Note 6 “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 ratio of fixed and floating interest rates in its portfolio. As of September 30, 2002, the interest rate swap’s fair market value resulted in an asset of $1.6 million and a comparable increase in debt. 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.

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Safe Harbor

Comments about market trends; anticipated earnings, manufacturing costs, pension expenses and funding, timing of land sales and repayment of borrowings are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The following important factors, among others, could cause actual results to differ materially from those expressed in the forward-looking statements: changes in global market trends and world events; interest rate and currency movements; changes in capital markets; fluctuations in demand for cellulose specialties, absorbent materials, timber and wood products; adverse weather conditions; changes in production costs for wood products and performance fibers, particularly for raw materials such as wood, energy and chemicals; unexpected delays in the closing of land sale transactions; and implementation or revision of governmental policies and regulations affecting the environment, import and export controls and taxes. For additional factors that could impact future results, please see the Company’s 2001 Annual Report on Form 10-K on file with the Securities and Exchange Commission.

Item 4.   Controls and Procedures

On November 4, 2002, the Company’s disclosure committee met with the Chief Executive Officer and the Chief Financial Officer (the “certifying officers”) to evaluate the Company’s disclosure controls and procedures. Based on such evaluation, the certifying officers concluded that the Company’s disclosure controls and procedures are well designed and effective in seeing that material information regarding the Company is promptly made available to senior management, including the certifying officers, in order to allow the Company to meet its reporting requirements under the Securities Exchange Act of 1934 in a timely manner. The Company’s disclosure committee met with the Chief Executive Officer and the Chief Financial Officer again on November 13, 2002, to finalize disclosure in this Form 10-Q.

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation.

PART II. OTHER INFORMATION

Item 1.   Legal Proceedings

Please refer to this Item in the Company’s Form 10-Q for the quarterly period ended June 30, 2002.

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ITEM 5(a).      SELECTED OPERATING INFORMATION*

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ITEM 5 (a). SELECTED OPERATING DATA * (millions of dollars, except per share data)

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         (a)     See Exhibit Index

SIGNATURE

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CERTIFICATIONS UNDER EXCHANGE ACT RULE 13a-14

I, W. L. Nutter, certify that:

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I, Gerald J. Pollack, certify that:

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EXHIBIT INDEX