RYN

Rayonier Inc. 10-Q Summary: Period Ended June 30, 2003

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended June 30, 2003, for Rayonier Inc. The company operates in three primary segments: Performance Fibers (cellulose specialties and absorbent materials), Timber and Land, and Wood Products (lumber and MDF). A significant corporate event during the period was a three-for-two stock split effected on June 12, 2003. The company also closed a major land sale ("Matanzas Marsh") in April 2003, which significantly impacted second-quarter results.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 9.9% in the quarter and 4.4% year-to-date compared to 2002. The increase was driven primarily by the $42 million Matanzas Marsh land sale and higher volumes in Performance Fibers.
• Profitability: Net income for the quarter more than doubled to $31.7 million from $16.2 million. Operating income rose 35.7% in the quarter, largely due to the land sale contribution of $39 million to operating income.
• Segment Performance:
  • Timber and Land: Operating income surged to $59.2 million (Q2) and $85.0 million (6mo) due to land sales, offsetting declines in timber volume and prices in the U.S.
  • Performance Fibers: Operating income declined to $2.8 million (Q2) from $11.0 million due to higher manufacturing costs (hardwood chips, chemicals) and an equipment outage.
  • Wood Products: Continued to report operating losses ($2.3 million Q2) due to weak lumber markets and higher MDF costs.
• Tax Rate: The effective tax rate decreased to 24.6% (Q2) and 20.0% (6mo) from 27.8% and 28.0% in the prior year, aided by foreign tax credits and a $2.3 million tax benefit from IRS audit negotiations.

Outlook, Risks, and Contingencies

• Guidance: Management expects third-quarter 2003 earnings to be lower than the second quarter due to the absence of a major land sale, weather-related hardwood chip shortages, and seasonally lower timber volumes.
• Liquidity: Free Cash Flow for the first six months was $57.2 million, down $19 million from the prior year due to working capital requirements, a $16 million tax deposit, and a $10 million pension contribution. The company maintains $170 million in available borrowings under its revolving credit facility.
• Legal and Environmental:
  • IRS Dispute: A dispute regarding 1996-1997 tax returns (potential $28.3 million liability) is under a settlement initiative. The company deposited $6.4 million in April 2003.
  • EPA Litigation: The EPA is seeking over $3.0 million for site investigation costs at the Port Angeles mill; the company disputes the claim and believes reserves are adequate.
  • Environmental Reserves: Total reserves for dispositions and discontinued operations were $157.9 million. The company estimates $7 million in reasonably possible additional losses beyond established reserves.
• Market Risks: The company utilizes derivatives to hedge foreign currency (NZD/USD), interest rates, and fuel oil prices. A hypothetical 4-cent change in the NZD/USD rate would impact pre-tax income by approximately $0.6 million.

Key Facts for Investor Verification

• Land Sale Impact: Verify the sustainability of earnings given that the $39 million operating income contribution from the Matanzas Marsh land sale is a non-recurring event.
• Performance Fibers Margins: Monitor the resolution of hardwood chip supply shortages and the impact of the Jesup, GA mill equipment outage on future margins.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the Covenant EBITDA to interest expense ratio (actual 5.70:1 vs. required 2.50:1).
• Environmental Liabilities: Track the status of the EPA lawsuit regarding the Port Angeles mill and the uncertainty surrounding the disposal liability for 150,000 tons of recycled material.
• Stock Split: Ensure all per-share data is adjusted for the three-for-two stock split effective June 12, 2003.