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 MARCH 31, 1997 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 (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 May 5, 1997, there were 28,959,528 Common Shares of the Registrant outstanding. ----------
2 RAYONIER INC. TABLE OF CONTENTS <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION Item l. Financial Statements Statements of Consolidated Income for the Three Months Ended March 31, 1997 and 1996 1 Consolidated Balance Sheets as of March 31, 1997 and December 3l, 1996 2 Statements of Consolidated Cash Flows for the Three Months Ended March 31, 1997 and 1996 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 6. Exhibits and Reports on Form 8-K 8 Signature 8 Exhibit Index 9 </TABLE> 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 l996 Annual Report on Form l0-K. RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Three Months Ended March 31, --------------- 1997 1996 ------------ ------------ <S> <C> <C> SALES $ 260,138 $ 293,980 ------------ ------------ Costs and expenses Cost of sales 209,781 225,674 Selling and general expenses 10,505 8,843 Other operating income, net (621) (429) ------------ ------------ 219,665 234,088 ------------ ------------ OPERATING INCOME 40,473 59,892 Interest expense (5,856) (7,146) Interest and miscellaneous income, net 397 1,488 Minority interest (8,079) (8,988) ------------ ------------ Income before income taxes 26,935 45,246 Provision for income taxes (8,539) (13,769) ------------ ------------ NET INCOME $ 18,396 $ 31,477 ============ ============ NET INCOME PER COMMON SHARE $ 0.62 $ 1.05 ============ ============ Weighted average Common Shares outstanding 29,721,186 30,089,060 ============ ============ </TABLE> 1
4 RAYONIER INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS <TABLE> <CAPTION> March 31, December 31, 1997 1996 --------- ------------ <S> <C> <C> CURRENT ASSETS Cash and short-term investments $ 2,878 $ 3,432 Accounts receivable, less allowance for doubtful accounts of $4,739 and $4,674 112,953 123,435 Inventories Finished goods 78,450 68,441 Work in process 22,749 20,128 Raw materials 36,495 39,650 Manufacturing and maintenance supplies 25,738 26,695 ---------- ---------- Total inventories 163,432 154,914 Timber stumpage purchases 24,212 31,416 Other current assets 18,663 13,223 Deferred income taxes 21,900 23,168 ---------- ---------- Total current assets 344,038 349,588 OTHER ASSETS 49,772 50,026 TIMBER STUMPAGE PURCHASES 22,108 23,341 TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION 494,806 490,298 PROPERTY, PLANT AND EQUIPMENT Land, buildings, machinery and equipment 1,219,239 1,190,786 Less - accumulated depreciation 524,447 506,308 ---------- ---------- 694,792 684,478 ---------- ---------- $1,605,516 $1,597,731 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 68,287 $ 87,609 Bank loans and current maturities 3,128 2,243 Accrued taxes 13,069 11,497 Accrued payroll and benefits 10,327 18,340 Accrued interest 8,110 5,154 Other current liabilities 49,261 55,976 Current reserves for dispositions and discontinued operations 41,120 40,003 ---------- ---------- Total current liabilities 193,302 220,822 DEFERRED INCOME TAXES 96,550 89,484 LONG-TERM DEBT 461,367 430,667 NON-CURRENT RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS 179,870 183,975 OTHER NON-CURRENT LIABILITIES 30,701 30,529 MINORITY INTEREST 18,341 18,864 SHAREHOLDERS' EQUITY Common Shares, 60,000,000 shares authorized, 29,128,823 and 29,282,455 shares issued and outstanding 138,048 145,679 Retained earnings 487,337 477,711 ---------- ---------- 625,385 623,390 ---------- ---------- $1,605,516 $1,597,731 ========== ========== </TABLE> 2
5 RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Three Months Ended March 31, --------------- 1997 1996 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 18,396 $ 31,477 Non-cash items included in income Depreciation, depletion and amortization 24,800 24,136 Deferred income taxes 7,239 1,617 Increase in other non-current liabilities 172 1,234 Change in accounts receivable, inventories and accounts payable (17,358) (26,960) Decrease in current timber stumpage purchases 7,204 6,744 Increase in other current assets (5,440) (7,191) (Decrease) increase in accrued liabilities (10,200) 4,485 Reduction in reserves for dispositions -- (1,250) -------- -------- CASH FROM OPERATING ACTIVITIES 24,813 34,292 ======== ======== INVESTING ACTIVITIES Capital expenditures, net of sales and retirements of $612 and $543 (39,622) (30,160) Expenditures for dispositions and discontinued operations, net of tax benefits of $1,095 and $321 (1,893) (558) Change in timber stumpage purchases and other assets 1,487 876 -------- -------- CASH USED FOR INVESTING ACTIVITIES (40,028) (29,842) ======== ======== FINANCING ACTIVITIES Issuance of debt 31,734 700 Repayments of debt (149) (1,348) Dividends paid (8,770) (8,600) Repurchase of Common Shares (8,167) (2,678) Issuance of Common Shares 536 398 (Decrease) increase in minority interest (523) 1,752 -------- -------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 14,661 (9,776) ======== ======== CASH AND SHORT-TERM INVESTMENTS Decrease in cash and short-term investments during the period (554) (5,326) Balance, beginning of period 3,432 10,932 -------- -------- Balance, end of period $ 2,878 $ 5,606 ======== ======== Supplemental disclosures of cash flow information Cash paid (received) during the period for: Interest $ 4,228 $ 4,830 ======== ======== Income taxes, net of refunds $ (52) $ (898) ======== ======== </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 months ended March 31, 1997 and 1996 were as follows (thousands of dollars): <TABLE> <CAPTION> Three Months Ended March 31, --------------- 1997 1996 --------- --------- <S> <C> <C> SALES TIMBER AND WOOD PRODUCTS Log trading and merchandising $ 56,737 $ 65,760 Timberlands management and stumpage 49,514 58,124 Wood products 29,663 20,638 Intrasegment eliminations (6,287) (11,472) --------- --------- Total Timber and Wood Products 129,627 133,050 --------- --------- SPECIALTY PULP PRODUCTS Chemical cellulose 80,216 75,617 Fluff and specialty paper pulps 43,194 56,038 --------- --------- Total Specialty Pulp Products 123,410 131,655 --------- --------- Intersegment eliminations (625) (1,596) --------- --------- Total before dispositions 252,412 263,109 Dispositions 7,726 30,871 --------- --------- Total sales $ 260,138 $ 293,980 ========= ========= OPERATING INCOME Timber and Wood Products $ 33,647 $ 37,183 Specialty Pulp Products 12,387 25,566 Corporate and other (4,144) (2,496) Intersegment eliminations 112 65 --------- --------- Total before dispositions 42,002 60,318 Dispositions (1,529) (426) --------- --------- Total operating income $ 40,473 $ 59,892 ========= ========= </TABLE> RESULTS OF OPERATIONS SALES AND OPERATING INCOME Sales of $260 million for the first quarter of 1997 were $34 million or 12 percent lower than the first quarter of 1996 due to the closure of the Port Angeles, WA pulp mill on February 28, 1997 and lower pulp prices. Operating income of $40 million was $19 million or 32 percent less than last year's first quarter as a result of the lower pulp pricing and weaker Asian log markets. 4
7 Timber and Wood Products Timber and Wood Products' sales in the first quarter were $130 million compared to $133 million for the same period of 1996. Operating income for the quarter of $34 million decreased $4 million from the prior year, reflecting lower stumpage pricing partially offset by stronger lumber prices and volumes. Log trading and merchandising sales of $57 million declined $9 million or 14 percent from the 1996 first quarter. The decrease in sales was due to lower New Zealand export log volumes, resulting from continued weakness in Asian wood markets. In North America, both selling prices and volume declined from 1996 resulting in reduced margins. Timberlands management and stumpage sales and operating income were below last year's first quarter as a result of lower stumpage prices in the U.S. Northwest. In the U.S. Southeast, weak demand from pulp and paper producers resulted in a decline in pine pulpwood prices, which was partially offset by increased harvest activity for chip'n saw and sawlog timber, driven by a strong lumber market. Wood products showed continued improvement due to increased capacity and productivity along with higher lumber prices resulting from a strong housing market. Specialty Pulp Products Sales of Specialty Pulp Products (from the Company's ongoing Jesup and Fernandina mills) were $123 million for the quarter compared to $132 million for the prior year's first quarter, and operating income declined $13 million to $12 million. Results were below the prior year when fluff pulp and chemical cellulose prices were starting to decline from their cyclical peaks. Pulp sales volumes and product mix strengthened. Production costs continued to improve due to lower chemical and other costs, declining $25 per ton from first quarter 1996. Dispositions Dispositions reflect results of the Company's Port Angeles mill (whose disposition was announced in October 1996) which were unfavorable to last year's first quarter due to lower pulp volumes and prices. OTHER INCOME / EXPENSE Interest expense was $6 million for the first quarter of 1997, $1 million favorable to 1996, reflecting lower interest rates and higher capitalized interest in connection with the Company's New Zealand MDF facility currently under construction. Interest and miscellaneous income, net declined $1 million from the prior year which included mark-to-market gains on forward exchange contracts. The Company uses these forward contracts to mitigate the impact of New Zealand/U.S dollar exchange rate fluctuations on New Zealand operating expenses. Minority interest in the earnings of Rayonier's subsidiary, Rayonier Timberlands, L.P. (RTLP) was slightly below that of the prior year period, reflecting lower Northwest U.S. stumpage prices. The minority participation in the earnings of RTLP will change from approximately 24 percent to approximately 1 percent effective January 1, 2001. NET INCOME Net income for the first quarter was $18 million or $0.62 per Common Share, compared to $31 million or $1.05 per Common Share in 1996. OTHER ITEMS In April the Company announced that a strategic assessment of its specialty pulp business had been completed. The Company indicated that the comprehensive study, performed with the assistance of a leading consulting firm, confirmed that existing strategies were sound and that it is taking appropriate steps to increase the pulp business' contribution to shareholder value. The report also reaffirmed that the closure of the Port Angeles pulp mill would significantly strengthen the competitiveness and long-term value of both the Jesup, GA and Fernandina Beach, FL mills. The Company indicated that actions are already underway to implement several significant cost-reduction opportunities that were identified. The study also indicated that Rayonier's excellence in technical research provides a competitive advantage and it helped clarify the relative priorities of several product development and quality enhancement programs designed to further strengthen the Company's market position. In addition, the study concluded that the balance and 5
8 flexibility of Rayonier's specialty pulp product mix - producing both chemical cellulose and fluff pulps - provide the greatest opportunity to maximize value. Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS), which establishes standards for computing and presenting EPS, is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 does not permit early application of its provisions. The statement replaces the presentation of primary EPS with a presentation of basic EPS, as defined. The Company's pro forma basic EPS determined in accordance with SFAS No. 128 was $0.63 and $1.06 for the three months ended March 31, 1997 and 1996, respectively. Pro forma diluted EPS would be unchanged from the reported income per Common share. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities of $25 million in the first quarter of 1997 decreased $9 million from 1996 as a result of lower earnings and an increase in working capital. EBITDA (defined as earnings from continuing operations before significant non-recurring items, provision for dispositions, interest expense, income taxes and depreciation, depletion and amortization) for the first quarter of 1997 was $58 million compared to $77 million for the same period of 1996. Cash from operating activities together with an increase in debt of $32 million financed capital expenditures of $40 million, dividends of $9 million and the repurchase of Common Shares of $8 million. In connection with the previously announced one-year increase in the Company's share repurchase program to $50 million for 1997, the Company repurchased 214,000 shares during the first quarter at an average cost of $38.16 for $8 million. Over the same period of 1996, the Company purchased 76,100 shares at an average cost of $35.19 per share for $3 million. First quarter ending debt was $464 million and the debt-to-capital-ratio was 42.6 percent compared to 41.0 percent at December 31, 1996. The Company has unsecured credit facilities totaling $300 million, which are used for direct borrowings and as support for $135 million of outstanding commercial paper. As of March 31, 1997, the Company had $165 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 Ended March 31, --------------- 1997 1996 -------- -------- <S> <C> <C> TIMBER AND WOOD PRODUCTS Log sales North America - million board feet 45 51 New Zealand - thousand cubic meters 237 370 Other - thousand cubic meters 133 34 Timber sales Northwest U.S. - million board feet 59 61 Southeast U.S. - thousand short green tons 610 570 New Zealand - thousand cubic meters 211 257 Lumber sold - million board feet 74 61 Intercompany sales Logs - million board feet 1 2 Northwest U.S. timber stumpage - million board feet 6 9 Southeast U.S. timber stumpage - thousand short green tons 25 48 New Zealand, thousand cubic meters 130 198 SPECIALTY PULP PRODUCTS Pulp sales (a) Chemical cellulose sales - thousand metric tons 89 79 Fluff and specialty paper pulp sales - thousand metric tons 81 79 Production as a percent of capacity 97.9% 99.3% SELECTED SUPPLEMENTAL INFORMATION (thousands of dollars) New Zealand - Sales $17,151 $25,296 ======= ======= New Zealand - Operating Income $ 211 $ 1,420 ======= ======= (a) Excludes Port Angeles statistics reflected below: Chemical cellulose sales - thousand metric tons 9 32 Fluff and specialty paper pulp sales - thousand metric tons 4 3 </TABLE> 7
10 PART II. OTHER INFORMATION 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 May 12, 1997 (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 Amended and Restated Revolving Credit Agreement Filed herewith dated as of April 11, 1997, for the $200 million Revolving Credit Agreement dated as of April 14, 1995 as amended as of June 16, 1995 and as of April 12, 1996 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 Other 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 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> 9