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, 1999 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 1177 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 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. YES (X) NO ( ) As of May 3, 1999, there were outstanding 27,789,215 Common Shares of the Registrant.
2 RAYONIER INC. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Consolidated Income for the Three Months Ended March 31, 1999 and 1998 1 Consolidated Balance Sheets as of March 31, 1999 and December 3l, 1998 2 Statements of Consolidated Cash Flows for the Three Months Ended March 31, 1999 and 1998 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5-8 Item 3. Selected Operating Data 8 Selected Supplemental Financial Data 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 6. Exhibits and Reports on Form 8-K 10 Signature 10 Exhibit Index 11 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. For a full description of accounting policies, please refer to Notes to Consolidated Financial Statements in the 1998 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 Ended March 31, ------------------------- 1999 1998 --------- --------- <S> <C> <C> SALES $ 226,396 $ 225,414 --------- --------- Costs and expenses Cost of sales 188,681 184,179 Selling and general expenses 9,465 8,347 Other operating income, net (1,194) (1,269) --------- --------- 196,952 191,257 --------- --------- OPERATING INCOME 29,444 34,157 Interest expense (7,703) (7,912) Interest and miscellaneous income, net 713 295 --------- --------- Income before income taxes 22,454 26,540 Provision for income taxes (7,324) (8,344) --------- --------- NET INCOME $ 15,130 $ 18,196 ========= ========= NET INCOME PER COMMON SHARE Basic EPS $ 0.54 $ 0.64 ========= ========= Diluted EPS $ 0.54 $ 0.63 ========= ========= </TABLE> 1
4 RAYONIER INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (THOUSANDS OF DOLLARS) ASSETS <TABLE> <CAPTION> March 31, December 31, 1999 1998 ---------- ---------- <S> <C> <C> CURRENT ASSETS Cash and short-term investments $ 5,662 $ 6,635 Accounts receivable, less allowance for doubtful accounts of $4,845 and $4,843 100,585 118,762 Inventories Finished goods 67,485 47,109 Work in process 14,156 15,762 Raw materials 13,031 13,212 Manufacturing and maintenance supplies 25,504 22,827 ---------- ---------- Total inventories 120,176 98,910 Timber purchase agreements 36,348 35,776 Other current assets 16,381 13,192 Deferred income taxes 7,384 8,559 ---------- ---------- Total current assets 286,536 281,834 OTHER ASSETS 64,091 65,988 TIMBER PURCHASE AGREEMENTS 18,897 20,922 TIMBER, TIMBERLANDS AND LOGGING ROADS, NET OF DEPLETION AND AMORTIZATION 544,097 544,190 PROPERTY, PLANT AND EQUIPMENT Land, buildings, machinery and equipment 1,306,456 1,304,188 Less - accumulated depreciation 631,425 616,266 ---------- ---------- 675,031 687,922 ---------- ---------- $1,588,652 $1,600,856 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 65,532 $ 65,844 Bank loans and current maturities 5,146 4,094 Accrued taxes 13,689 8,728 Accrued payroll and benefits 20,927 21,460 Accrued interest 10,244 6,182 Other current liabilities 45,763 44,279 Current reserves for dispositions and discontinued operations 20,906 22,167 ---------- ---------- Total current liabilities 182,207 172,754 DEFERRED INCOME TAXES 118,256 115,405 LONG-TERM DEBT 456,976 485,850 NON-CURRENT RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS 157,242 159,198 OTHER NON-CURRENT LIABILITIES 29,140 28,690 SHAREHOLDERS' EQUITY Common Shares, 60,000,000 shares authorized, 27,795,347 and 27,767,309 shares issued and outstanding 78,930 79,561 Retained earnings 565,901 559,398 ---------- ---------- 644,831 638,959 ---------- ---------- $1,588,652 $1,600,856 ========== ========== </TABLE> 2
5 RAYONIER INC. AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Three Months Ended March 31, ----------------------- 1999 1998 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 15,130 $ 18,196 Non-cash items included in income Depreciation, depletion and amortization 26,696 22,913 Deferred income taxes 2,848 4,912 Increase in other non-current liabilities 450 3,887 Change in accounts receivable, inventories and accounts payable (3,401) 2,184 (Increase) decrease in current timber purchase agreements (572) 854 (Increase) decrease in other current assets (3,189) 1,852 Increase (decrease) in accrued liabilities 9,974 (14,524) --------- --------- CASH FROM OPERATING ACTIVITIES 47,936 40,274 --------- --------- INVESTING ACTIVITIES Capital expenditures, net of sales and retirements of $24 and $677 (13,712) (24,275) Acquisition of Rayonier Timberlands, L.P. Class A Units -- (48,821) Expenditures for dispositions and discontinued operations, net of tax benefits of $1,178 and $1,298 (2,039) (2,243) Change in timber purchase agreements and other assets 3,922 (6,361) --------- --------- CASH USED FOR INVESTING ACTIVITIES (11,829) (81,700) --------- --------- FINANCING ACTIVITIES Issuance of debt 59,853 143,770 Repayments of debt (87,675) (77,167) Dividends paid (8,627) (8,781) Repurchase of Common Shares (1,523) (2,313) Issuance of Common Shares 892 672 Buyout of minority interest -- (16,959) --------- --------- CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (37,080) 39,222 --------- --------- CASH AND SHORT-TERM INVESTMENTS Decrease in cash and short term investments (973) (2,204) Balance, beginning of period 6,635 10,661 --------- --------- Balance, end of period $ 5,662 $ 8,457 ========= ========= Supplemental disclosures of cash flow information Cash paid during the period for: Interest $ 3,694 $ 4,703 ========= ========= Income taxes $ 216 $ 3,612 ========= ========= </TABLE> 3
6 RAYONIER INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1. EARNINGS PER COMMON SHARE The following table provides details of the calculation of basic and diluted EPS in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" for the three months ended March 31, 1999 and 1998. <TABLE> <CAPTION> 1999 1998 ----------- ----------- <S> <C> <C> Net Income $ 15,130 $ 18,196 =========== =========== Shares used for determining basic EPS 27,806,659 28,311,424 Dilutive effect of: Stock options 230,249 279,187 Contingent shares 240,000 231,084 ----------- ----------- Shares used for determining diluted EPS 28,276,908 28,821,695 =========== =========== Basic EPS $ 0.54 $ 0.64 =========== =========== Diluted EPS $ 0.54 $ 0.63 =========== =========== </TABLE> 4
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEGMENT INFORMATION Rayonier operates in two major business segments, Timber and Wood Products and Specialty Pulp Products. The Timber and Wood Products segment includes two reportable business units: Forest Resources and Trading, and Wood Products. Chemical Cellulose, and Fluff and Specialty Paper Pulps are product lines within the Specialty Pulp Products segment. The amounts and relative contributions to sales and operating income attributable to each of Rayonier's reportable business units for the three months ended March 31, 1999 and 1998 were as follows (thousands of dollars): <TABLE> <CAPTION> Three Months Ended March 31, -------------------------- 1999 1998 --------- --------- <S> <C> <C> SALES Timber and Wood Products Forest Resources and Trading $ 100,042 $ 84,429 Wood Products 24,628 29,207 --------- --------- Total Timber and Wood Products 124,670 113,636 Specialty Pulp Products Chemical Cellulose 62,840 67,745 Fluff and Specialty Paper Pulps 39,029 45,114 --------- --------- Total Specialty Pulp Products 101,869 112,859 Intersegment eliminations (143) (1,081) --------- --------- Total sales $ 226,396 $ 225,414 ========= ========= OPERATING INCOME Timber and Wood Products Forest Resources and Trading $ 28,517 $ 35,290 Wood Products (901) (5,654) --------- --------- Total Timber and Wood Products 27,616 29,636 Specialty Pulp Products 5,866 7,892 Corporate and other (4,038) (3,371) --------- --------- Total operating income $ 29,444 $ 34,157 ========= ========= </TABLE> RESULTS OF OPERATIONS SALES AND OPERATING INCOME Sales for the first quarter of 1999 were $226 million, $1 million higher than the first quarter of 1998. The increase in sales was principally due to higher trading activity offset by lower pulp volume and chemical cellulose prices, and the absence of lumber sales from the Company's Plummer, ID lumber mill which closed in July 1998 after the facility was damaged by a fire. Operating income of $29 million was $5 million below the prior year, as a result of lower U.S. timber volume and prices, and weaker pulp volume and chemical cellulose prices partially offset by lower manufacturing costs and the absence of losses at the Plummer, ID lumber mill. 5
8 TIMBER AND WOOD PRODUCTS Sales were higher than the prior year by $11 million, while operating income declined by $2 million from last year. FOREST RESOURCES AND TRADING Forest Resources and Trading sales for the three month period ended March 31, 1999 were $100 million, $16 million higher than 1998 due to growth of wood products trading, which began operating in the first quarter of 1998, and higher log trading activity in Asian and U.S. domestic markets. These improvements were partially offset by lower U.S. timber volume and prices. Operating income for the quarter of $29 million was $7 million below last year. The decline resulted from reduced timber prices and volumes in both the Northwest and Southeast U.S., partly offset by higher log trading margins. Northwest U.S. timber prices declined due to the impact of the Asian economic crisis on export products. Southeast U.S. pulpwood demand was weak due to extensive pulp mill closures and downtime in the region. In the first quarter of 1998, Southeast U.S. timber markets experienced price improvements due to unusually wet weather that led to restricted supply and difficult logging conditions. WOOD PRODUCTS Wood Products sales of $25 million for the three month period were $5 million lower than 1998 resulting from the absence of sales from the Plummer, ID lumber mill and slightly lower Southeast U.S. lumber volume and prices partially offset by higher MDF volume and prices. An operating loss of $1 million represented an improvement of $5 million from the prior year's first quarter resulting from stronger MDF performance due to new markets, better pricing, and lower production costs, the absence of losses generated by the Plummer, ID lumber mill and lower log costs at the Company's Southeast U.S. lumber mills. These positive factors were reduced by slightly lower lumber sales volume and prices compared to last year although prices were higher than 1998's fourth quarter. SPECIALTY PULP PRODUCTS Sales of Specialty Pulp Products for the three-month period were $102 million, $11 million lower than 1998. The decline was primarily due to weaker demand for both fluff and paper and chemical cellulose pulps and lower chemical cellulose pricing. Operating income for the first three months was $6 million, $2 million lower than 1998 resulting from the lower sales volumes and prices, offset by lower wood and manufacturing costs. CORPORATE AND OTHER Corporate and other costs for the first quarter of 1999 were above 1998 reflecting higher general and corporate development expenses. OTHER INCOME / EXPENSE Interest expense of $8 million for the first three months of 1999 was slightly below the first quarter of 1998 due to lower average interest rates. Miscellaneous income in the first quarter of 1999 was higher than 1998 due to the favorable impact of a contract settlement. The effective tax rate of 32.6 percent for the first three months of 1999 compared to 31.4 percent in 1998. The 1999 rate reflects lower tax benefits from foreign operations and reduced research and development tax credits. NET INCOME Net income for the first quarter was $15.1 million or $0.54 per Common Share, compared to $18.2 million, or $0.63 cents per Common Share in 1998. 6
9 OTHER ITEMS In an April 19 press release the Company indicated that its prospects for improved results were encouraging based on positive signs in some of the Company's markets and recent economic forecasts for Asia, Europe and Latin America for a second half recovery. Price increases for fluff pulp appeared to be holding and further increases were possible. Lumber markets were strong and Northwest U.S. log sales should improve as Asia recovers. Some softness in Southeast U.S. timber prices was expected, but the overall impact would be favorable due to lower wood costs at the Company's pulp and lumber mills. The Company announced that it would take a 44-day market related shutdown at its Fernandina Beach, FL pulp mill beginning April 21 and a scheduled maintenance shutdown at its Jesup, GA pulp mill in May to complete maintenance and capital projects. Most of the financial impact of the shutdowns would be offset by contributions to income from lower pulp production costs and continued strength in lumber and Northwest timber activity. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operating activities of $48 million for the first three months of 1999 increased $8 million from 1998 as a result of decreased working capital requirements. 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 three months of 1999 amounted to $57 million, similar to 1998 first quarter results. Cash from operating activities helped to finance capital expenditures of $14 million, dividends of $9 million and the repurchase of Common Shares for $2 million. In 1999, first quarter ending debt was $462 million and the debt-to-capital-ratio was 41.7 percent compared to debt of $490 million and a debt to capital ratio of 43.4 percent at December 31, 1998. The Company repurchased 37,400 of its shares during the first three months of 1999 at an average cost of $40.52 for a total of $1.5 million. Over the same period of 1998, the Company repurchased 52,080 shares at an average cost of $44.42 per share for a total of $2.3 million. The Company has unsecured credit facilities totaling $300 million, which were used as support for $106 million of outstanding commercial paper. As of March 31, 1999, the Company had $194 million available under its revolving credit facilities. 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. YEAR 2000 COMPLIANCE Rayonier began its company-wide Year 2000 Project in 1996 and expects all phases to be completed by the end of the third quarter of 1999. The Project is designed to identify Year 2000 problems and take corrective action covering business and process control systems, networking communications, personal computer applications, embedded microprocessors and third party supplier and customer risks. The Company has engaged outside consultants to advise on, assist in and monitor compliance. The project team reports directly to the Company's senior executive officers and regularly provides program updates to the Audit Committee of the Board of Directors. The estimated total amount expended on the Year 2000 Project through the first quarter of 1999 was less than $2 million and the Company estimates that future costs could range up to $2 million. Many of the Company's systems were upgraded or replaced in the ordinary course of business during the last five years, and costs related to those upgrades and replacements are not included in the Year 2000 Project expenses. The Company believes that with the completion of its Year 2000 Project as scheduled, the risks will be minimized and the possibility of significant interruptions of operations reduced. However, if the Company and its third party suppliers and customers do not complete in a timely manner their assessment, remediation and testing for Year 2000 compliance, there can be no assurance that Year 2000 problems will not materially adversely affect the Company's results of operations or its relationships with its suppliers and customers. The Company has not yet been able to clearly identify the most reasonably likely worst case scenarios and the appropriate contingency plans for such scenarios. As the Company completes all phases of its Year 2000 Project, it will prepare contingency plans for critical systems to deal with any areas where it determines that risks of non-compliance are significant. 7
10 SAFE HARBOR Comments about market trends, anticipated earnings and future activities, including disclosures about the Company's Year 2000 project, are forward-looking and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Changes in factors referred to in such disclosures, and changes in the following additional important factors, among others, could cause actual results to differ materially from those expressed in the forward-looking statements: changes in global market trends; adverse weather conditions in the Company's operating areas; the possibility of forest fires; fluctuations in demand for specialty chemical cellulose and fluff pulps, 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; production costs for wood products and for specialty pulps, particularly for raw materials such as wood and chemicals; governmental policies and regulations affecting the environment, import and export controls, and taxes; and interest rate and currency movements. ITEM 3. SELECTED OPERATING DATA <TABLE> <CAPTION> Three Months Ended March 31, ------------- 1999 1998 ----- ----- <S> <C> <C> TIMBER AND WOOD PRODUCTS Log trading sales volume North America, in millions of board feet 30 33 New Zealand, in thousands of cubic meters 272 151 Other, in thousands of cubic meters 110 38 Timber sales volume Northwest U.S., in millions of board feet 65 67 Southeast U.S., in thousands of short green tons 533 609 New Zealand, in thousands of cubic meters 270 126 Lumber sales volume, in millions of board feet 56 74(a) Medium-density fiberboard sales volume, in thousands of cubic meters 27 13 Intercompany timber sales volume Northwest U.S., in millions of board feet 10 2 Southeast U.S., in thousands of short green tons 7 32 New Zealand, in thousands of cubic meters 121 60 SPECIALTY PULP PRODUCTS Pulp sales volume Chemical cellulose, in thousands of metric tons 74 77 Fluff and specialty paper pulp, in thousands of metric tons 77 86 Production as a percent of capacity 100.6% 98.4% </TABLE> (a) Includes sales of 17 by the Plummer lumber mill, which closed in July 1998 after fire damaged the facility. 8
11 SELECTED SUPPLEMENTAL FINANCIAL DATA (thousands of dollars, except per share data) <TABLE> <CAPTION> Three Months Ended March 31, -------------------------- 1999 1998 -------- -------- <S> <C> <C> GEOGRAPHICAL DATA (NON-U.S.) Sales New Zealand $ 18,284 $ 11,066 Other 9,982 3,136 -------- -------- Total $ 28,266 $ 14,202 ======== ======== Operating Income New Zealand $ (1,635) $ (5,280) Other (306) (1,249) -------- -------- Total $ (1,941) $ (6,529) ======== ======== FOREST RESOURCES Sales Northwest U.S. $ 23,866 $ 26,834 Southeast U.S. 16,942 21,580 New Zealand 5,362 3,456 -------- -------- Total $ 46,170 $ 51,870 ======== ======== Operating Income Northwest U.S. $ 18,566 $ 20,982 Southeast U.S 12,463 16,377 New Zealand 998 655 -------- -------- Total $ 32,027 $ 38,014 ======== ======== EBITDA per Share Northwest U.S. $ 0.69 $ 0.75 Southeast U.S 0.53 0.64 New Zealand 0.14 0.08 -------- -------- Total $ 1.36 $ 1.47 ======== ======== </TABLE> 9
12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Rayonier's 10-K for 1998 reported that the U.S. Court of Appeals for the Eleventh Circuit on March 10, 1999 affirmed summary judgment in favor of Rayonier in an action brought by Powell-Duffryn Terminals. Subsequently, on March 31, 1999, Powell Duffryn filed a motion for rehearing by the same court. 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 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 May 14, 1999 10
13 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 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> 11