RYN

Rayonier Inc. Q1 2009 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2009. Rayonier Inc. is a leading international forest products company operating in four segments: Timber, Real Estate, Performance Fibers, and Wood Products. The company is structured as a Real Estate Investment Trust (REIT). During the quarter, the company classified its New Zealand joint venture and related operations as discontinued operations pending sale.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total sales remained relatively flat, down slightly by $0.7 million. This stability masked significant segment shifts: Performance Fibers sales increased $28.7 million, while Timber sales dropped $11.5 million and Wood Products sales fell $7.1 million.
• Profitability: Operating income declined $15.9 million (27%) primarily due to weaker results in Timber and Real Estate segments. Net income decreased $13.8 million.
• Segment Performance:
  • Timber: Operating income swung from a $10.8 million profit to a $1.2 million loss. Western region prices dropped 22% and volumes 44% due to sawmill curtailments. Eastern region volumes rose 20% but prices fell 17%.
  • Real Estate: Operating income fell $7.4 million. Rural property sales volumes and prices declined, partially offset by a significant increase in non-strategic timberland sales (15,000 acres).
  • Performance Fibers: Operating income rose $3.7 million to $40.8 million, driven by a 17% price increase in cellulose specialties and higher volumes in absorbent materials.
  • Wood Products: Operating loss widened to $3.6 million from $2.5 million due to the weak housing market impacting both prices and volumes.
• Cash Flow: Operating cash flow decreased $35.4 million, attributed to lower earnings and higher working capital requirements (specifically inventory buildup).

Outlook, Risks, and Unusual Items

• Outlook: Management expects to generate cash flows well in excess of the $2.00 per share dividend for 2009. However, the weak housing market is expected to continue negatively impacting Timber businesses, particularly in the Northwest. Performance Fibers earnings are expected to remain strong and in line with 2008 levels.
• Subsequent Event (Tax Credits): On April 8, 2009, the IRS approved Rayonier's application as an alternative fuel mixer. The company expects to recognize approximately $40 million in tax credits in Q2 2009, with a total of $60 million expected for the full year 2009.
• Liquidity: The company has $145 million of capacity remaining on its $250 million revolving credit facility. $122 million in installment notes mature on December 31, 2009, which management anticipates refinancing.
• Risks: Risks include potential challenges to the alternative fuel tax credits by the IRS, changes in law limiting credit availability, and continued volatility in the housing market affecting timber and wood products demand.

Investor Verification Checklist

• Alternative Fuel Tax Credits: Verify the recognition timing and magnitude of the $60 million in expected tax credits and the risk of IRS challenges.
• Timber Segment Recovery: Monitor Western region harvest levels and pricing trends given the severe volume and price declines in Q1.
• Debt Maturity: Confirm the refinancing strategy for the $122 million installment notes due December 31, 2009, amidst tight credit markets.
• Discontinued Operations: Track the progress of the sale of the New Zealand joint venture and related assets held for sale ($49.8 million).
• Inventory Levels: Assess the impact of rising inventory levels on working capital and future cash flow generation.