UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ........... TO ............ COMMISSION FILE NUMBER 1-6780 RAYONIER INC. Incorporated in the State of North Carolina I.R.S. Employer Identification Number 13-2607329 50 North Laura Street, Jacksonville, FL 32202 (Principal Executive Office) Telephone Number: (904) 357-9100 Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) As of November 2, 2001, there were outstanding 27,268,878 Common Shares of the Registrant. --------------
RAYONIER INC. FORM 10-Q SEPTEMBER 30, 2001 TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item l. Financial Statements Statements of Consolidated Income for the Three Months and Nine Months Ended September 30, 2001, and 2000 1 Consolidated Balance Sheets as of September 30, 2001, and December 3l, 2000 2 Statements of Consolidated Cash Flows for the Nine Months Ended September 30, 2001, and 2000 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 11 PART II. OTHER INFORMATION Item 5. Selected Operating Data 12 Item 6. Exhibits and Reports on Form 8-K 14 Signature 14 Exhibit Index 15 </TABLE> i
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 -------------------------- ------------------------- 2001 2000 2001 2000 --------- ---------- --------- --------- <S> <C> <C> <C> <C> SALES $ 274,961 $ 269,501 $ 897,810 $ 928,008 --------- ---------- --------- --------- Costs and Expenses Cost of sales 245,615 227,887 749,303 742,602 Selling and general expenses 7,417 6,845 24,610 26,197 Other operating (income) expense, net (136) 1,204 (568) 3,725 --------- ---------- --------- --------- 252,896 235,936 773,345 772,524 --------- ---------- --------- --------- OPERATING INCOME 22,065 33,565 124,465 155,484 Interest expense (16,431) (20,586) (52,883) (64,988) Interest and miscellaneous income (expense), net 1,012 (2,378) 1,226 (3,001) --------- ---------- --------- --------- INCOME BEFORE INCOME TAXES 6,646 10,601 72,808 87,495 Income tax (expense) benefit (621) 1,504 (23,068) (22,486) --------- ---------- --------- --------- NET INCOME 6,025 12,105 49,740 65,009 OTHER COMPREHENSIVE INCOME (LOSS): Unrealized gain (loss) on hedged transactions, net of tax benefit of $123 (209) - (209) - --------- ---------- --------- --------- COMPREHENSIVE INCOME $ 5,816 $ 12,105 $ 49,531 $ 65,009 ========= ========== ========= ========= EARNINGS PER COMMON SHARE (EPS) BASIC EPS $ 0.22 $ 0.45 $ 1.83 $ 2.38 ========= ========== ========= ========= DILUTED EPS $ 0.22 $ 0.44 $ 1.80 $ 2.34 ========= ========== ========= ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 1
RAYONIER INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> (UNAUDITED) ASSETS September 30, December 31, 2001 2000 ----------- ----------- <S> <C> <C> CURRENT ASSETS Cash and short-term investments $ 25,627 $ 9,824 Accounts receivable, less allowance for doubtful accounts of $3,390 and $3,969 102,220 117,114 Inventories Finished goods 50,175 60,627 Work in process 9,445 9,076 Raw materials 11,172 11,044 Manufacturing and maintenance supplies 17,008 16,359 ----------- ----------- Total inventories 87,800 97,106 Timber purchase agreements 20,774 33,775 Other current assets 6,957 12,779 ----------- ----------- Total current assets 243,378 270,598 ----------- ----------- OTHER ASSETS 56,417 63,129 TIMBER PURCHASE AGREEMENTS 6,183 6,335 TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION 1,138,268 1,192,388 PROPERTY, PLANT AND EQUIPMENT Land, buildings, machinery and equipment 1,367,999 1,360,296 Less - accumulated depreciation 772,806 730,472 ----------- ----------- Total property, plant and equipment, net 595,193 629,824 ----------- ----------- TOTAL ASSETS $ 2,039,439 $ 2,162,274 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 62,854 $ 87,401 Bank loans and current maturities 2,600 2,565 Accrued taxes 15,508 10,314 Accrued payroll and benefits 23,964 27,756 Accrued interest 18,435 11,745 Accrued customer incentives 10,546 18,163 Other current liabilities 14,282 22,389 Current reserves for dispositions and discontinued operations 15,329 15,434 ----------- ----------- Total current liabilities 163,518 195,767 ----------- ----------- DEFERRED INCOME TAXES 134,868 130,333 LONG-TERM DEBT 852,205 970,415 NON-CURRENT RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS 154,990 161,465 OTHER NON-CURRENT LIABILITIES 27,668 24,193 SHAREHOLDERS' EQUITY Common Shares, 60,000,000 shares authorized, 27,263,378 and 27,104,462 shares issued and outstanding 54,659 48,717 Retained earnings 651,740 631,384 Accumulated other comprehensive income (loss) (209) - ----------- ----------- 706,190 680,101 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,039,439 $ 2,162,274 =========== =========== </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 2
RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Nine Months Ended September 30 --------------------------- 2001 2000 ---------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 49,740 $ 65,009 Non-cash items included in income: Depreciation, depletion and amortization 139,550 132,239 Deferred income taxes 2,055 7,634 Non-cash cost of land sales 8,715 10,464 Increase in other non-current liabilities 3,475 6,064 Change in accounts receivable, inventory and accounts payable (459) (9,476) Decrease (increase) in current timber purchase agreements 13,001 (2,364) Decrease (increase) in other current assets 5,848 (928) (Decrease) increase in accrued liabilities (7,841) 10,448 Expenditures for dispositions and discontinued operations, net of tax benefits of $2,454 and $2,537 (4,126) (4,390) ---------- --------- CASH FROM OPERATING ACTIVITIES 209,958 214,700 ---------- --------- INVESTING ACTIVITIES Capital expenditures, net of sales and retirements of $153 and $1,891 (58,639) (63,269) Change in timber purchase agreements and other assets 6,101 12,982 ---------- --------- CASH USED FOR INVESTING ACTIVITIES (52,538) (50,287) ---------- --------- FINANCING ACTIVITIES Issuance of debt 147,500 70,901 Repayment of debt (265,675) (197,793) Dividends paid (29,384) (29,394) Repurchase of common shares (2,031) (17,624) Issuance of common shares 7,973 1,859 ---------- --------- CASH USED FOR FINANCING ACTIVITIES (141,617) (172,051) ---------- --------- CASH AND SHORT TERM INVESTMENTS Increase (decrease) in cash and short-term investments 15,803 (7,638) Balance, beginning of year 9,824 12,265 ---------- --------- Balance, end of period $ 25,627 $ 4,627 ========== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 44,944 $ 50,852 ========== ========= Income taxes $ 17,513 $ 13,621 ========== ========= </TABLE> The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. 3
RAYONIER INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED) 1. BASIS OF PRESENTATION 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. For a full description of accounting policies, please refer to the Notes to Consolidated Financial Statements in the 2000 Annual Report on Form 10-K. 2. EARNINGS PER COMMON SHARE The following table provides details of the calculation of basic and diluted earnings per common share in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" for the three months and nine months ended September 30, 2001, and 2000 (share amounts actual): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 2001 2000 2001 2000 ---- ---- ----- ---- <S> <C> <C> <C> <C> Net income $ 6,025 $ 12,105 $ 49,740 $ 65,009 ========== ========== ========== ========== Shares used for determining basic earnings per common share 27,266,368 27,134,430 27,186,767 27,282,984 Dilutive effect of: Stock options 221,935 140,264 210,930 177,394 Contingent shares 202,000 360,000 202,000 360,000 ---------- ---------- ---------- ---------- Shares used for determining diluted earnings per common share 27,690,303 27,634,694 27,599,697 27,820,378 ========== ========== ========== ========== Basic earnings per common share $ .22 $ 0.45 $ 1.83 $ 2.38 ========== ========== ========== ========== Diluted earnings per common share $ .22 $ 0.44 $ 1.80 $ 2.34 ========== ========== ========== ========== </TABLE> 3. SHAREHOLDERS' EQUITY An analysis of shareholders' equity for the nine months ended September 30, 2001, and the year ended December 31, 2000, follows (share amounts actual): <TABLE> <CAPTION> ---------- ---------- Shares Amount Income/(Loss) Earnings Equity ---------- ---------- ------------- ----------- ----------- <S> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1999 27,407,094 $ 63,709 $ - $ 592,382 $ 656,091 Net income - - - 78,187 78,187 Dividends paid ($1.44 per share) - - - (39,185) (39,185) Issuance of shares under incentive stock plans 130,368 2,632 - - 2,632 Repurchase of common shares (433,000) (17,624) - - (17,624) ---------- ---------- ------------- ----------- ----------- BALANCE, DECEMBER 31, 2000 27,104,462 $ 48,717 $ - $ 631,384 $ 680,101 Net income - $ - $ - $ 49,740 $ 49,740 Dividends paid ($1.08 per share) - - - (29,384) (29,384) Issuance of shares under incentive stock plans 211,816 7,973 - - 7,973 Unrealized gain (loss) on hedged transactions - - (209) - (209) Repurchase of common shares (52,900) (2,031) - - (2,031) ---------- ---------- ------------- ----------- ----------- BALANCE, SEPTEMBER 30, 2001 27,263,378 $ 54,659 $ (209) $ 651,740 $ 706,190 ========== ========== ============= =========== =========== </TABLE> 4
RAYONIER INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED) 4. IDENTIFIABLE ASSETS Total assets by segment as of September 30, 2001, and December 31, 2000, follows (in millions): <TABLE> <CAPTION> IDENTIFIABLE ASSETS 2001 2000 ---- ---- <S> <C> <C> Performance Fibers $ 584 $ 643 Timberland Management 1,190 1,243 Wood Products and Trading 214 234 Corporate and other 41 32 Dispositions 10 10 ------ ------- Total $ 2,039 $ 2,162 ====== ======= </TABLE> See Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for information about segment sales and operating income. 5. RECLASSIFICATIONS Certain reclassifications of the prior period amounts have been made to conform to the current year presentation. Effective December 31, 2000, the Company changed its method of reporting freight revenue and costs in compliance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting for Shipping and Handling Fees and Costs." Freight costs are now charged to cost of sales rather than netted against sales. The Company's financial statements have been reclassified to reflect the increase in sales and cost of sales of $18.5 million for the three months ended September 30, 2000, and $54.7 million for the nine months ended September 30, 2000. On November 28, 2000, the Company announced its intention to focus on two core businesses, Performance Fibers and Timberland Management, and de-emphasize activities in a third segment, Wood Products and Trading. Based upon the segment changes and the Company's intention of selling timberlands on a more regular basis, certain items in the financial statements have been reclassified. The gain of $23.1 million from the sale of timberland in the first quarter of 2000 was reclassified to Land (previously Timberland and Real Estate) and had the effect of increasing sales by $49.6 million and cost of sales by $26.5 million. The non-cash expenses relating to the depletion of merchantable and pre-merchantable timber for land sales are recorded in the "Depreciation, depletion and amortization" line of the cash flow statement, and the basis in the land is recorded in the "Non-cash cost of land sales" line. All changes noted herein had no effect on net income or earnings per share in the prior period. 6. FINANCIAL INSTRUMENTS 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. The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, on January 1, 2001. The adoption did not have a material impact on the Company's consolidated financial position or results of operations. 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). 5
RAYONIER INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLAR AMOUNTS IN THOUSANDS UNLESS OTHERWISE STATED) On September 1, 2001, the Company designated its New Zealand dollar forward contracts as cash flow hedges of certain forecasted New Zealand dollar cash outflows. Previous to this date, the Company marked the contracts to market and recorded the resulting gain or loss in the Statement of Consolidated Income. After the designation on September 1, 2001, changes in the fair value of the forward contracts were deferred and recorded as part of "Accumulated other comprehensive income (loss)." When the forecasted transaction comes to fruition and is recorded in earnings, these gains or losses will be reclassified to the Statement of Consolidated Income. The change in the forward instruments' overall fair value attributable to time value is excluded from the measurement of the derivatives' effectiveness and those changes are recognized in earnings throughout the life of the contract. These amounts are recorded on the line entitled "Interest and miscellaneous income (expense), net" in the Statement of Consolidated Income. In the Company's Statement of Consolidated Income for the three and nine months ended September 30, 2001, a gain of approximately $0.4 million and a loss of approximately $0.4 million, respectively, was recorded on foreign currency contracts reflecting primarily mark to market adjustments prior to designating these instruments as cash flow hedges. Time value changes are included in these amounts and were negligible for the periods presented. The Company recorded an after-tax loss of approximately $0.2 million in "Accumulated other comprehensive income (loss)" in the Consolidated Balance Sheet as of September 30, 2001, as a result of applying the aforementioned cash flow hedge accounting beginning September 1, 2001. We expect to reclassify this amount into earnings during the next seven months as the forecasted transactions affect earnings. At September 30, 2001, the Company held contracts maturing through May 2002 totaling $7.3 million (nominal value). The largest amount of foreign currency forward contracts outstanding during the first nine months of 2001 totaled $17.7 million (nominal value). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEGMENT INFORMATION Rayonier operates in three major business segments: Performance Fibers, Timberland Management, and Wood Products and Trading. The Performance Fibers segment includes two reportable business units, Cellulose Specialties and Absorbent Materials. The Timberland Management segment includes two reportable business units, Timber Harvest and Land (previously Timberland and Real Estate). Prior years' segment information has been reclassified to conform with the segment information presented in the current year. The amounts and relative contributions to sales and operating income (loss) attributable to each of Rayonier's reportable business units for the three months and nine months ended September 30, 2001, and 2000, were as follows (thousands of dollars): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30, ------------------- -------------------- 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> SALES Performance Fibers Cellulose Specialties $ 96,108 $ 82,952 $ 281,993 $ 256,921 Absorbent Materials 40,669 59,717 139,539 170,900 --------- --------- --------- --------- Total Performance Fibers 136,777 142,669 421,532 427,821 --------- --------- --------- --------- Timberland Management Timber Harvest 41,124 40,320 152,787 153,603 Land 7,404 4,926 70,862 61,861 --------- --------- --------- --------- Total Timberland Management 48,528 45,246 223,649 215,464 --------- --------- --------- --------- Wood Products and Trading 93,696 85,862 269,787 308,377 Intersegment Eliminations (4,040) (4,276) (17,158) (23,654) --------- --------- --------- --------- TOTAL SALES $ 274,961 $ 269,501 $ 897,810 $ 928,008 ========= ========= ========= ========= OPERATING INCOME (LOSS) Performance Fibers $ 4,652 $ 22,853 $ 32,530 $ 61,362 Timberland Management Timber Harvest 15,817 17,052 72,490 85,699 Land 5,572 3,878 40,756 32,985 --------- --------- --------- --------- Total Timberland Management 21,389 20,930 113,246 118,684 --------- --------- --------- --------- Wood Products and Trading (1,042) (7,696) (7,294) (10,358) Corporate and other (2,934) (2,522) (14,017) (14,204) --------- --------- --------- --------- TOTAL OPERATING INCOME $ 22,065 $ 33,565 $ 124,465 $ 155,484 ========= ========= ========= ========= </TABLE> Operating income (loss) as stated in the preceding tables and as presented in the Statement of Consolidated Income is equal to Segment income (loss). The income (loss) items below "Operating income" in the Statement 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. 7
RESULTS OF OPERATIONS SALES AND OPERATING INCOME Sales for the third quarter of 2001 were $275 million, $5 million above prior year primarily due to higher cellulose specialties volume, Northwest U.S. timber volume and increased wood products sales, partially offset by lower absorbent materials volume and prices as well as weaker U.S. timber prices and trading activity. Operating income for the third quarter was $22 million, $11 million below prior year due to the impact of lower fluff pulp prices and volume and higher manufacturing costs for performance fibers, partially offset by lower wood products manufacturing costs and higher land sales. Sales for the nine months ended September 30, 2001, were $898 million, $30 million lower compared to the same period in 2000 mainly due to weaker trading activity as well as lower lumber, timber and fluff pulp prices, partially offset by stronger cellulose specialties volume. Operating income for the nine months ended September 30, 2001, was $124 million, $31 million lower than prior year primarily due to lower fluff pulp and timber prices and higher performance fibers manufacturing cost, partially offset by higher operating income from land sales. PERFORMANCE FIBERS Sales of Performance Fibers products for the third quarter of 2001 were $137 million, $6 million lower than third-quarter 2000, while sales for the nine months ended September 30, 2001, of $422 million, were lower by $6 million compared to last year's results. Lower absorbent materials volume and prices as well as slightly lower cellulose specialties prices contributed to the decline, partially offset by increased cellulose specialties volume. Operating income for the three and nine months ended September 30, 2001, was $5 million and $33 million, respectively, which was $18 million and $29 million lower compared to the prior year periods. The decline in operating income was due to a 23 percent and 9 percent decline in average fluff pulp prices for the three and nine months ended September 30, 2001, respectively, and higher manufacturing costs, partially offset by higher cellulose specialty sales volumes. CELLULOSE SPECIALTIES Cellulose Specialty sales of $96 million for the third quarter of 2001 were $13 million higher than the third quarter of 2000 and sales of $282 million for the nine months ended September 30, 2001, were $25 million higher compared to the same period in 2000. The increase from prior year for the three and nine month periods was primarily due to 16 percent and 11 percent higher sales volumes, respectively, partly offset by slightly lower prices. Demand for our cellulose specialty grades was strong during the quarter. ABSORBENT MATERIALS Absorbent Material sales of $41 million for the third quarter of 2001 were $19 million lower than the third quarter of 2000, while sales of $140 million for the nine months ended September 30, 2001, were $31 million lower compared to the same period in 2000. The decrease from prior year was primarily due to the weakening of fluff pulp prices and lower sales volumes of 16 percent and 14 percent, respectively, for the three and nine months ended September 30, 2001. TIMBERLAND MANAGEMENT Sales of $49 million were $3 million higher than third-quarter 2000 while operating income of $21 million was essentially flat at last year's level. Sales of $224 million for the nine months ended September 30, 2001, were $8 million above prior year, while operating income of $113 million was $5 million lower. TIMBER HARVEST Timber Harvest sales for the third quarter of 2001 were $41 million, $1 million higher than the third quarter of 2000, with operating income of $16 million, approximately $1 million lower than prior year. Sales for the nine months ended September 30, 2001 were $153 million, $1 million lower than the prior year. Operating income for the same period declined by $13 million to $72 million. The decrease in sales and operating income was mainly due to lower timber prices resulting from weak lumber and export markets, partially offset by higher timber volume. 8
LAND Land sales of $7 million increased by $2 million over the third quarter of 2000, while operating income of $6 million increased by $2 million due to higher acreage sold in 2001. Sales for the nine months ended September 30, 2001 were $71 million, $9 million higher than prior year, with operating income for the same period improving $8 million to $41 million. The increases were principally due to this year's Pinhook sale having a higher margin than last year's large land sale. WOOD PRODUCTS AND TRADING Third quarter 2001 sales were $94 million compared to $86 million in the third quarter of 2000, while an operating loss of $1 million compared very favorably to $8 million in losses last year. The operating loss was lower due to a reduction in manufacturing costs. Sales for the nine months ended September 30, 2001, declined by $39 million to $270 million from the prior year, however this year's operating loss of $7 million was $3 million improved over the prior year. The lower operating loss compared to the prior nine month period was also due to lower manufacturing costs, partly offset by weaker trading margins and lower lumber prices. CORPORATE AND OTHER Corporate and other expenses for the third quarter and the nine months ended September 30, 2001, of $3 million and $14 million, respectively, were essentially flat compared to the prior year. OTHER INCOME / EXPENSE Interest expense for the third quarter of 2001 was $16 million, a decrease of $4 million from the third quarter of 2000 due to lower average debt and lower interest rates. Similarly, interest expense for the nine months ended September 30, 2001, declined by $12 million to $53 million versus the prior year, principally due to lower average debt. Miscellaneous income (expense) for the third quarter of 2001 was $1 million, an improvement of $3 million over the prior year's quarter, and $1 million for the nine months ended September 30, 2001, an improvement of $4 million over 2000. The improvement for both the third quarter of 2001 and the nine months ended September 30, 2001, was primarily due to favorable variances in the remeasurement of New Zealand dollar forward contracts and the impact of designating foreign currency forwards as hedges under SFAS No. 133 as of September 1, 2001. The effective tax rate for the third quarter of 2001 was 9.4 percent, while a tax benefit of $1.5 million was recorded on income of $10.6 million in the prior year quarter. In the current quarter, a revision was made to the estimate of the annual effective tax rate for the year. Last year, the Company reduced its annual effective tax rate following the resolution of certain outstanding tax issues. These reductions resulted in effective tax rates of 31.7 percent and 25.7 percent for the nine months ended September 30, 2001, and 2000, respectively. The Company's effective tax rate continues to be below U.S. statutory rates due to lower tax rates in effect for foreign subsidiaries and the impact of various tax credits. NET INCOME Net income for the third quarter of 2001 was $6 million, or $0.22 per diluted common share, compared to $12.1 million, or $0.44 per diluted common share, for the third quarter of 2000, primarily due to lower absorbent materials prices, higher performance fibers manufacturing cost and a higher effective tax rate. These were partially offset by higher wood products earnings, lower interest expense and the favorable translation impact of a stronger New Zealand dollar. Net income for the nine months ended September 30, 2001, was $49.7 million, or $1.80 per diluted common share, compared to $65.0 million, or $2.34 per diluted common share, for the nine months ended September 30, 2000. Net income was lower primarily due to lower timber and performance fibers prices (mainly fluff pulp), higher performance fibers manufacturing cost and lower trading activity, partially offset by higher cellulose specialties and timber volume. 9
OTHER ITEMS The strong dollar and continuing weak global economy make it difficult to predict when overall market conditions will improve. As a result, fourth quarter earnings are likely to be comparable to the third quarter. However, strong demand for our high-value cellulose specialty products is expected to continue. LIQUIDITY AND CAPITAL RESOURCES Cash flow provided by operating activities of $210 million for the first nine months of 2001 decreased $5 million compared to the first nine months of 2000. Lower income, partially offset by a decrease in working capital, accounted for the change. Cash provided by operating activities financed capital expenditures of $59 million, dividends of $29 million, share repurchases of $2 million and a net debt reduction of $118 million. Cash flow used for investing activities for the first nine months of 2001 of $53 million was $2 million higher than 2000 primarily due to a lower decrease in timber purchase agreements and other assets, partially offset by lower capital expenditures. Cash flow used for financing activities for the nine months ended September 30, 2001, was $142 million, a decrease of $30 million from 2000. This was due to lower repurchases of common shares and an increase in the issuance of common shares in 2001, and higher net debt repayments in 2000. The Company repurchased 52,900 of its common shares during the third quarter and the nine months ended September 30, 2001, at an average price of $38.39 or a total cost of $2 million. The Company repurchased 204,500 of its shares during the third quarter of 2000 at an average price of $40.41 or a total cost of $8 million, and 433,000 shares during the nine months ended September 30, 2000, at an average cost of $40.70 or a total cost of $18 million. At September 30, 2001, debt was $855 million, a reduction of $118 million from December 31, 2000, and the debt-to-capital ratio was 54.8 percent compared to 58.9 percent at December 31, 2000. As of September 30, 2001, Rayonier had $375 million available under its revolving credit facilities. The Company is currently re-negotiating one of these facilities and intends to lower the total amount available under these facilities to $300 million. In addition, 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. OTHER DATA 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) for the first nine months of 2001 was $274 million, $21 million lower than the first nine months of 2000. The decrease in EBITDA was primarily due to lower absorbent materials and timber prices partly offset by higher cellulose specialties and timber volumes in 2001. Free cash flow (defined as EBITDA plus significant non-recurring items, less income taxes, interest expense, change in working capital, long-term assets and liabilities, custodial capital spending and prior-year dividend levels) decreased $28 million, to $131 million for the first nine months of 2001, when compared to the same period last year. ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial and reporting issues for business combinations. SFAS No. 142 addresses how intangible assets should be accounted for in financial statements upon their acquisition. The adoption of SFAS No. 141 in the third quarter of 2001 did not have an impact on the Company's financial statements and the adoption of SFAS No. 142 on January 1, 2002, is not expected to have an impact either. Also in July 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." This statement requires entities to record a legal obligation associated with the retirement of a tangible long-lived asset in the period in which it is incurred. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company will adopt the standard effective January 1, 2003, and is currently assessing the impact on its operations. 10
In September 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No. 121 and APB Opinion No. 30, but retains their fundamental provisions. The statement is effective for fiscal years beginning after December 15, 2001, and the Company will adopt it effective January 1, 2002. The adoption is not expected to have an impact on the Company's financial statements. 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, 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 6, "Financial Instruments" included in this Form 10-Q. Circumstances surrounding the Company's exchange rate risk, commodity price risk and interest rate risk remain unchanged from December 31, 2000. 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 2000 Annual Report on Form 10-K. SAFE HARBOR Comments about market trends, anticipated earnings, expected pricing levels and future activities, such as land sales and timber harvest and production levels, 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 that could impact customer demand; interest rate and currency movements; fluctuations in demand for cellulose specialties and absorbent materials, export and domestic logs, and wood products; the impact of such market factors on the company's timber sales in the U.S. and New Zealand; adverse weather conditions; production costs for wood products and for performance fibers, particularly for raw materials such as wood, energy and chemicals; and 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 most recent Form 10-K on file with the Securities and Exchange Commission. 11
ITEM 5. SELECTED OPERATING DATA <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2001 2000 2001 2000 ----------- ------------ ------------ ----------- <S> <C> <C> <C> <C> PERFORMANCE FIBERS Pulp Sales Volume Cellulose specialties, in thousands of metric tons 111 95 324 291 Absorbent materials, in thousands of metric tons 69 82 216 250 Production as a percent of capacity 88.2% 103.4% 96.4% 102.9% TIMBERLAND MANAGEMENT Timber sales volume Northwest U.S., in millions of board feet 48 26 185 180 Southeast U.S., in thousands of short green tons 1,184 1,237 4,430 3,373 New Zealand, in thousands of cubic meters 380 370 983 912 Intercompany timber sales volume Northwest U.S., in millions of board feet 10 6 45 45 Southeast U.S., in thousands of short green tons 2 4 32 27 New Zealand, in thousands of cubic meters 186 177 494 440 WOOD PRODUCTS AND TRADING Lumber sales volume, in millions of board feet 79 51 199 186 Medium-density fiberboard sales volume, in thousands of cubic meters 37 37 113 113 Log trading sales volume North America, in millions of board feet 42 42 128 166 New Zealand, in thousands of cubic meters 250 348 713 897 Other, in thousands of cubic meters 31 41 263 246 </TABLE> 12
SELECTED SUPPLEMENTAL FINANCIAL DATA (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2001 2000 2001 2000 ------------ ------------ ----------- ----------- <S> <C> <C> <C> <C> GEOGRAPHICAL DATA (NON-U.S.) Sales New Zealand $ 28.6 $ 30.7 $ 78.8 $ 82.6 Other 5.0 8.0 30.2 37.5 ------------ ------------ ----------- ----------- Total $ 33.6 $ 38.7 $ 109.0 $ 120.1 ============ ============ =========== =========== Operating Income (Loss) New Zealand $ 1.6 $ (0.4) $ 2.2 $ (1.9) Other (0.8) (0.5) (1.6) (0.2) ------------ ------------ ----------- ----------- Total $ 0.8 $ (0.9) $ 0.6 $ (2.1) ============ ============ =========== =========== TIMBERLAND MANAGEMENT Sales Northwest U.S. $ 11.4 $ 8.4 $ 49.6 $ 64.4 Southeast U.S. 28.4 29.5 152.3 133.6 New Zealand 8.8 7.3 21.8 17.5 ------------ ------------ ----------- ----------- Total $ 48.6 $ 45.2 $ 223.7 $ 215.5 ============ ============ =========== =========== Operating Income Northwest U.S. $ 6.7 $ 5.3 $ 35.5 $ 52.3 Southeast U.S. 12.4 12.7 72.3 60.7 New Zealand 2.3 2.9 5.5 5.7 ------------ ------------ ----------- ----------- Total $ 21.4 $ 20.9 $ 113.3 $ 118.7 ============ ============ =========== =========== EBITDA PER SHARE Performance Fibers $ 0.83 $ 1.52 $ 3.23 $ 4.23 Timberland Management 1.45 1.40 7.11 6.96 Wood Products and Trading 0.10 (0.09) 0.13 0.07 Corporate and other (0.08) (0.18) (0.53) (0.65) ------------ ------------ ----------- ----------- Total $ 2.30 $ 2.65 $ 9.94 $ 10.61 ============ ============ =========== =========== </TABLE> 13
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index. SIGNATURE 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. RAYONIER INC. (Registrant) BY:GERALD J. POLLACK ----------------- Gerald J. Pollack Senior Vice President and Chief Financial Officer (Chief Accounting Officer) November 13, 2001 14
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION LOCATION - ---------- ----------- -------- <S> <C> <C> 2 Plan of acquisition, reorganization, None arrangement, liquidation or succession 3.1 Amended and restated articles of incorporation No amendments 3.2 By-laws No amendments 4 Instruments defining the rights of security holders, Not required to be filed. The including indentures Registrant hereby agrees to file with the Commission a copy of any instrument defining the rights of holders of the Registrant's long-term debt upon request of the Commission. 10.23 Change in control agreement for W. Lee Nutter Filed herewith 11 Statement re: computation of per share earnings Not required to be filed 12 Statement re: computation of ratios Filed herewith 15 Letter re: unaudited interim financial information None 18 Letter re: change in accounting principles None 19 Report furnished to security holders None 22 Published report regarding matters None submitted to vote of security holders 23 Consents of experts and counsel None 24 Power of attorney None 99 Additional exhibits None </TABLE> 15
EXHIBITS