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Rayonier Inc. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Rayonier Inc., a leading international forest products company, for the period ended September 30, 2009. The company operates in four reportable segments: Timber, Real Estate, Performance Fibers, and Wood Products. Rayonier is structured as a Real Estate Investment Trust (REIT). A significant development in this period was the company's certification as an alternative fuel mixer in April 2009, allowing it to claim tax credits for burning "black liquor" at its Performance Fibers mills.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Surge: Net income for the nine months ended September 30, 2009, increased to $214.8 million from $105.2 million in the prior year period. This 104% increase is primarily driven by the recognition of $141.8 million in Alternative Fuel Mixture Credits (AFMC) recorded as "Other operating income, net."
• EBITDA Growth: EBITDA for the nine months ended September 30, 2009, was $415.3 million compared to $275.3 million in 2008. Excluding the AFMC, EBITDA was slightly below the prior year period due to lower timber segment results.
• Segment Performance:
  • Performance Fibers: Sales increased to $597.6 million (9mo) due to higher cellulose specialties prices, though volumes declined slightly.
  • Timber: Sales decreased to $125.0 million (9mo) due to a shift from higher-priced sawtimber to lower-priced pulpwood and reduced volumes in the Western region.
  • Real Estate: Sales increased to $89.9 million (9mo) driven by higher non-strategic timberland sales volume, offsetting lower prices.
  • Wood Products: Sales declined significantly to $37.5 million (9mo) due to the weak housing market and planned production curtailments.
• Debt Structure: In August 2009, the company issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015. Proceeds were used to repay a portion of indebtedness and fund hedge transactions.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2009 EBITDA to be approximately 10% below 2008 levels. EPS (excluding AFMC) is expected to be about 20% below 2008. Cash generation is expected to remain strong, with Adjusted Cash Available for Distribution (CAD) comparable to 2008 and well above the $2.00 per share dividend.
• Capital Expenditures: Forecasted to be between $90 million and $95 million for 2009, down from $105 million in 2008.
• Risks and Contingencies:
  • AFMC Expiration: The alternative fuel mixture credit is scheduled to expire on December 31, 2009. There is a risk that the IRS may challenge eligibility or that legislative changes could limit the credit.
  • Environmental Liabilities: The company has established liabilities for dispositions and discontinued operations, with a potential range of additional losses up to $32 million due to uncertainties in remediation technologies and regulations.
  • Market Conditions: Continued weakness in the housing market impacts the Wood Products segment, and global economic conditions affect timber prices and volumes.

Key Facts for Investor Verification

• AFMC Impact: Verify the sustainability of earnings excluding the $141.8 million one-time tax credit, which significantly inflated 2009 net income and operating income.
• Debt Covenants: Confirm continued compliance with financial covenants, specifically the Covenant EBITDA to interest expense ratio (actual 11.01 to 1 vs. required 2.50 to 1) and the debt-to-capital ratio (43%).
• Timber Harvest Strategy: Monitor the company's decision to hold off harvesting valuable sawtimber in anticipation of price recovery, which impacts near-term timber revenue.
• Convertible Notes: Review the terms of the new $172.5 million 4.50% Senior Exchangeable Notes and the associated hedge/warrant transactions intended to limit dilution.
• Environmental Reserves: Assess the adequacy of the $99.6 million liability for dispositions and discontinued operations against potential future remediation costs.