1 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 JUNE 30, 1996 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 l3-2607329 l177 Summer Street, Stamford, Connecticut 06905-5529 (Principal Executive Office) Telephone Number: (203) 348-7000 Indicate by check mark whether the registrant (1) 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 August 6, 1996, there were 29,469,322 Common Shares of the Registrant outstanding. __________
2 RAYONIER INC. TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income for the Three Months and Six Months Ended June 30, 1996 and 1995 1 Consolidated Balance Sheets as of June 30, 1996 and December 3l, 1995 2 Statements of Consolidated Cash Flows for the Six Months Ended June 30, 1996 and 1995 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 4-6 Item 3. Selected Operating Data 7 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 8 Item 5. Other Information 8 Item 6. Exhibits and Reports on Form 8-K 8 Signature 8 Exhibit Index 9-10 i
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The following unaudited financial statements reflect, in the opinion of Rayonier Inc. (Rayonier or the Company), all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results of operations, the financial position and the cash flows for the periods presented. Certain reclassifications have been made to the prior year's financial statements to conform to current year presentation. For a full description of accounting policies, please refer to Notes to Consolidated Financial Statements in the 1995 Annual Report on Form 10-K. RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> SALES $ 296,667 $ 313,564 $ 590,647 $ 599,396 ----------- ----------- ----------- ----------- Costs and expenses Cost of sales 254,787 252,213 480,461 476,257 Selling and general expenses 9,398 9,426 18,241 17,813 Other operating income, net (467) (1,766) (896) (3,209) ----------- ----------- ----------- ----------- 263,718 259,873 497,806 490,861 ----------- ----------- ----------- ----------- OPERATING INCOME 32,949 53,691 92,841 108,535 Interest expense (7,097) (8,773) (14,243) (17,308) Interest and miscellaneous income, net 1,473 999 2,961 1,667 Minority interest (7,549) (7,272) (16,537) (16,572) ----------- ----------- ----------- ----------- Income before income taxes 19,776 38,645 65,022 76,322 Provision for income taxes (4,372) (12,307) (18,141) (24,835) ----------- ----------- ----------- ----------- NET INCOME $ 15,404 $ 26,338 $ 46,881 $ 51,487 =========== =========== =========== =========== NET INCOME PER COMMON SHARE $ 0.51 $ 0.88 $ 1.56 $ 1.72 =========== =========== =========== =========== Weighted average Common Shares outstanding 30,030,479 29,955,149 30,060,476 29,895,951 =========== =========== =========== =========== </TABLE> 1
4 RAYONIER INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS <TABLE> <CAPTION> June 30, December 31, 1996 1995 -------------- --------------- <S> <C> <C> CURRENT ASSETS Cash and short-term investments $ 4,813 $ 10,932 Accounts receivable, less allowance for doubtful accounts of $4,394 and $4,420 138,039 128,478 Inventories Finished goods 63,047 71,307 Work in process 21,351 25,681 Raw materials 41,793 44,350 Manufacturing and maintenance supplies 30,780 28,740 ------------- -------------- Total inventories 156,971 170,078 Timber stumpage 31,198 49,464 Other current assets 22,703 15,412 Deferred income taxes 13,243 15,208 ------------- -------------- Total current assets 366,967 389,572 OTHER ASSETS 47,752 47,239 TIMBER STUMPAGE 34,940 29,396 TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION 483,244 476,463 PROPERTY, PLANT AND EQUIPMENT Land, buildings, machinery and equipment 1,358,027 1,292,059 Less - accumulated depreciation 617,492 586,796 ------------- -------------- 740,535 705,263 ------------- -------------- $ 1,673,438 $ 1,647,933 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 89,326 $ 102,938 Bank loans and current maturities 2,929 3,040 Accrued taxes 20,050 9,941 Accrued payroll and benefits 18,041 26,554 Accrued interest 5,166 5,268 Other current liabilities 36,370 39,943 Current reserves for dispositions 16,116 16,047 ------------- -------------- Total current liabilities 187,998 203,731 DEFERRED INCOME TAXES 163,245 160,574 LONG-TERM DEBT 461,972 446,696 NON-CURRENT RESERVES FOR DISPOSITIONS 19,292 23,542 OTHER NON-CURRENT LIABILITIES 26,519 25,204 MINORITY INTEREST 21,386 18,815 SHAREHOLDERS' EQUITY Common Shares, 60,000,000 shares authorized, 29,510,389 and 29,653,278 shares issued and outstanding 152,977 159,032 Retained earnings 640,049 610,339 ------------- -------------- 793,026 769,371 ------------- -------------- $ 1,673,438 $ 1,647,933 ============= ============== </TABLE> 2
5 RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Six Months Ended June 30, -------------- 1996 1995 ------------- -------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 46,881 $ 51,487 Non-cash items included in income Depreciation, depletion and amortization 46,687 47,238 Deferred income taxes 4,024 7,912 Increase in other non-current liabilities 1,315 2,679 Change in accounts receivable, inventories and accounts payable (10,066) (60,371) Decrease in current timber stumpage 18,266 268 Increase in other current assets (7,291) (2,904) Decrease in accrued liabilities (2,079) (10,112) Change in reserves for dispositions (2,500) (2,533) ------------- -------------- Cash from operating activities 95,237 33,664 ------------- -------------- INVESTING ACTIVITIES Capital expenditures, net of sales and retirements of $671 and $713 (88,740) (68,332) Expenditures for dispositions, net of tax benefits of $612 and $2,165 (1,069) (3,654) Change in timber stumpage and other assets (6,057) (1,087) ------------- -------------- Cash used for investing activities (95,866) (73,073) ------------- -------------- FINANCING ACTIVITIES Issuance of debt 17,200 50,773 Repayments of debt (2,035) (201) Dividends (17,170) (14,808) (Repurchase) issuance of Common Shares (6,056) 858 Increase (decrease) in minority interest 2,571 (1,037) ------------- -------------- Cash (used for) provided by financing activities (5,490) 35,585 ------------- -------------- CASH AND SHORT-TERM INVESTMENTS Decrease during the period (6,119) (3,824) Balance, beginning of period 10,932 9,178 ------------- -------------- Balance, end of period $ 4,813 $ 5,354 ============= ============== Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 15,210 $ 16,755 ============= ============== Income taxes, net of refunds $ 6,900 $ 19,251 ============= ============== </TABLE> 3
6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The sales and operating income of Rayonier's business segments for the three and six months ended June 30, 1996 and 1995 were as follows (thousands of dollars): <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- SALES <S> <C> <C> <C> <C> TIMBER AND WOOD PRODUCTS Log trading and merchandising $ 92,965 $ 121,301 $ 160,757 $ 201,302 Timberlands management and stumpage 41,192 37,508 90,941 87,661 Wood products 27,129 19,409 47,767 34,532 Intrasegment eliminations (3,158) (5,564) (8,287) (9,748) ----------- ----------- ----------- ----------- Total Timber and Wood Products 158,128 172,654 291,178 313,747 ----------- ----------- ----------- ----------- SPECIALTY PULP PRODUCTS Chemical cellulose 95,499 82,423 200,143 166,029 Fluff and specialty paper pulps 43,856 64,933 101,738 132,093 ----------- ----------- ----------- ----------- Total Specialty Pulp Products 139,355 147,356 301,881 298,122 ----------- ----------- ----------- ----------- Intersegment eliminations (816) (6,446) (2,412) (12,473) ----------- ----------- ----------- ----------- Total sales $ 296,667 $ 313,564 $ 590,647 $ 599,396 =========== =========== =========== =========== OPERATING INCOME Timber and Wood Products $ 32,466 $ 35,747 $ 69,649 $ 78,501 Specialty Pulp Products 4,035 20,374 29,175 35,647 Corporate and other (3,693) (3,330) (6,189) (5,501) Intersegment eliminations 141 900 206 (112) ----------- ----------- ----------- ----------- Total operating income $ 32,949 $ 53,691 $ 92,841 $ 108,535 =========== =========== =========== =========== </TABLE> RESULTS OF OPERATIONS SALES AND OPERATING INCOME Sales of $297 million for the second quarter of 1996 were $17 million or 5 percent lower than the second quarter of 1995 due primarily to lower log trading and merchandising sales in the Pacific Rim. Operating income of $33 million was $21 million or 39 percent lower than last year's second quarter due to lower fluff pulp pricing and continued weakness in Asian wood markets which affected pricing for logs. Sales for the six months ended June 30, 1996 of $591 million were $9 million or 1 percent lower than the prior year, and operating income of $93 million decreased $16 million or 14 percent from the prior year. 4
7 Timber and Wood Products Timber and Wood Products' sales in the second quarter were $158 million, down $15 million from the 1995 second quarter. Operating income for the quarter of $32 million was down $3 million from the prior year. Sales for the six month period were $291 million, down $23 million from the same period of 1995, with operating income of $70 million down $9 million from the prior year. The declines were due to lower log and stumpage prices reflecting continued softness in Asian markets. Log trading and merchandising sales and operating income, which include the Company's New Zealand log sales, declined from the 1995 second quarter due to weakness in Asian markets which pushed prices down for U.S. domestic and export logs. In New Zealand, volume was down compared to last year's second quarter and pricing was slightly lower, due to continued weak export markets. Timberlands management and stumpage sales improved from the second quarter of 1995 reflecting higher volume which was mostly offset by lower stumpage prices contracted during weak 1995-96 timber and wood markets. By midyear, customers in the Northwest had cut about two-thirds of the anticipated annual harvest at prices higher than the Company expects to realize in the second half of 1996. Wood products results improved significantly from a year ago due to improved lumber markets and lower log costs. Specialty Pulp Products Sales of Specialty Pulp Products were $139 million, down $8 million from last year's second quarter, and operating income declined $16 million as a result of lower fluff pulp pricing. Shipments remained strong even though the Company's Port Angeles, Washington, mill took market down time. Specialty Pulp Products sales for the first half of 1996 were $302 million, up $4 million from the prior period reflecting higher volume. Operating income declined $6 million to $29 million in 1996 reflecting lower fluff pulp prices largely offset by higher chemical cellulose prices. Fluff pulp prices declined significantly in the first six months of 1996 stabilizing late in the second quarter. The Company is undertaking a comprehensive study to help develop long-term strategies to enhance profitability and reduce the cyclicality of its specialty pulp business. The study will focus on potential growth opportunities, new end uses and the cost competitiveness of each of the pulp mills. Intersegment Six month intersegment sales of $2 million in 1996 were less than the comparable 1995 amount due to lower stumpage sales from the Timber and Wood Products segment to the Specialty Pulp Products segment. OTHER ITEMS As previously announced, the Company's results for 1996 are expected to be below last year's results. Fluff pulp pricing bottomed out in the second quarter of 1996 and appears to be on a modest upward trend with price increases announced for the third quarter. Some of this initial price move will be offset by moderate reductions in second half prices for chemical cellulose pulps, which lag the commodity pulp cycle. In the Timber and Wood Products segment, weak Asian markets will likely result in lower demand and prices for export logs and timber in the second half of 1996. The Company's Form 10-K for 1995 referred to federal environmental regulations governing air and water discharges that were proposed in 1993. In July 1996, the U.S. Environmental Protection Agency announced that it anticipates that technologies other than those which formed the basis of the proposed water regulations will be used to establish the final regulations for dissolving pulp mills. The agency said that it would await the results of studies being undertaken by the Company and other manufacturers of chemical cellulose pulps before proposing final regulations. The Company now expects that its costs to comply with these regulations will probably be less than previously estimated with implementation required at later dates than originally projected. Interest expense was $14 million for the first half of 1996, $3 million favorable to 1995, reflecting a lower average debt level, lower interest rates and higher capitalized interest expense. Minority interest in the earnings of Rayonier's subsidiary, Rayonier Timberlands, L.P. (RTLP) was relatively flat to the first half of 1995, reflecting higher Northwest U.S. stumpage volume offset by lower Southeast U.S. stumpage volume and lower prices in 5
8 both regions. The minority participation in the earnings of RTLP will change from approximately 24 percent to approximately 1 percent effective January 1, 2001. The effective tax rate for the first half of 1996 was 27.9 percent compared to 32.5 percent in the 1995 first half. The change reflects 1996 recognition of a tax asset related to a prior year transaction following resolution of various uncertainties related to its realization. NET INCOME Net income for the second quarter was $15 million or $0.51 per Common Share, down $11 million or $0.37 per Common Share from 1995. Net income for the six months ended June 30, 1996 was $47 million or $1.56 per Common Share, down $5 million or $0.16 per Common Share. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities of $95 million for the first six months of 1996 increased from $34 million in 1995 as a result of reduced working capital requirements. EBITDA (defined as earnings from continuing operations before non-recurring items, interest expense, income taxes and depreciation, depletion and amortization) for the first six months of 1996 of $126 million decreased $15 million from the comparable period of 1995. Cash from operations and new debt financed capital expenditures of $89 million, dividends of $17 million and the repurchase of Common Shares of $7 million. Second quarter ending debt of $465 million was $15 million greater than year-end debt. The Company's debt-to-total-capital-ratio at June 30, 1996 was 37 percent, the same level as at year-end 1995. During the first quarter of 1996, the Company began a common share repurchase program to minimize the dilutive effect on earnings per share of its employee incentive stock plans. The number of shares that may be repurchased each year is limited to the greater of 1.5 percent of the Company's outstanding shares or the number of incentive stock shares issued to employees during the year. The Company expects to repurchase approximately 300,000 to 450,000 shares in 1996. In the first six months, 191,700 shares were repurchased at an average cost of $36.03 per share with a total cost of approximately $7 million. The Company has unsecured credit facilities totaling $300 million, which are used for direct borrowings and as support for $115 million of outstanding commercial paper. As of June 30, 1996, the Company had $185 million of available borrowings under its revolving credit facilities. In addition, through currently effective shelf registration statements filed with the Securities and Exchange Commission, the Company may offer up to $141 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. 6
9 ITEM 3. SELECTED OPERATING DATA <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1996 1995 1996 1995 ---- ---- ---- ---- <S> <C> <C> <C> <C> TIMBER AND WOOD PRODUCTS Log sales North America - millions of board feet 83 108 134 168 New Zealand - thousands of cubic meters 427 465 856 852 Other - millions of board feet 3 4 9 6 Timber harvest Northwest U.S. - millions of board feet 53 42 114 88 Southeast U.S. - thousands of short green tons 537 476 1,107 1,148 New Zealand - thousands of cubic meters 291 324 548 604 Lumber sold - millions of board feet 73 53 134 94 Intercompany sales Logs - millions of board feet 2 10 4 11 Northwest U.S. timber stumpage - millions of board feet 4 10 13 17 Southeast U.S. timber stumpage - thousands of short green tons 28 37 76 202 SPECIALTY PULP PRODUCTS Pulp sales Chemical cellulose sales - thousands of metric tons 100 103 211 208 Fluff and specialty paper pulp sales - thousands of metric tons 91 81 173 174 Production as a percent of capacity 85.7% 89.9% 89.6% 95.3% SELECTED SUPPLEMENTAL INFORMATION (thousands of dollars) New Zealand - Sales $25,709 $28,794 $ 51,005 $ 53,076 ====== ====== ======= ====== New Zealand - Operating Income $ 1,984 $ 3,714 $ 3,404 $ 7,407 ====== ====== ======= ======= </TABLE> 7
10 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Company was held on May 17, 1996. At that meeting, three directors were elected as follows (there were no broker non-votes with respect to the election of directors): <TABLE> <CAPTION> Votes For Votes Withheld --------- -------------- <S> <C> <C> Directors of Class II, Term Expires in 1999: William J. Alley 26,538,261 79,477 Paul G. Kirk, Jr. 26,250,342 367,396 Gordon I. Ulmer 26,546,950 70,788 </TABLE> ITEM 5. OTHER INFORMATION On July, 19, 1996, W. Lee Nutter was elected President and Chief Operating Officer and a director of the Company. On the same date, Ronald M. Gross's title was changed to Chairman and Chief Executive Officer. William J. Alley, a director of the Company, died on July 26, 1996. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index. (b) Rayonier Inc. did not file a report on Form 8-K during the quarter covered by this report. SIGNATURE Pursuant to the requirements of Section 13 of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RAYONIER INC. (Registrant) --------------------------- BY KENNETH P. JANETTE ------------------ Kenneth P. Janette Vice President and Corporate Controller August 13, 1996 (Chief Accounting Officer) 8
11 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 4.1 Amendment No. 1, dated as of June 16, 1995, to Filed herewith the $100 million 364-day Revolving Credit Agreement dated as of April 14, 1995 among Rayonier Inc. as Borrower and the banks named therein as Banks, Citibank, N.A. as Administrative Agent and Citicorp Securities, Inc. and the Toronto-Dominion Bank as Arrangers 4.2 Amendment No. 2, dated as of April 12, 1996, to Filed herewith the $100 million 364-day Revolving Credit Agreement dated as of April 14, 1995 among Rayonier Inc. as Borrower and the banks named therein as Banks, Citibank, N.A. as Administrative Agent and Citicorp Securities, Inc. and the Toronto-Dominion Bank as Arrangers 4.3 Amendment No. 1, dated as of June 16, 1995, to Filed herewith the $200 million Revolving Credit Agreement dated as of April 14, 1995 among Rayonier Inc. as Borrower and the banks named therein as Banks, Citibank, N.A. as Administrative Agent and Citicorp Securities, Inc. and the Toronto-Dominion Bank as Arrangers 4.4 Amendment No. 2, dated as of April 12, 1996, to Filed herewith the $200 million Revolving Credit Agreement dated as of April 14, 1995 among Rayonier Inc. as Borrower and the banks named therein as Banks, Citibank, N.A. as Administrative Agent and Citicorp Securities, Inc. and the Toronto-Dominion Bank as Arrangers 4.5 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 Material contracts None 11 Statement re computation of per share earnings Not required to be filed </TABLE> 9
12 EXHIBIT INDEX ------------- <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION LOCATION ----------- ----------- -------- <S> <C> <C> 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 27 Financial data schedule Filed herewith 99 Additional exhibits None </TABLE> 10