RYN

Rayonier Inc. 10-Q Summary: Period Ended June 30, 2005

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Rayonier Inc., a Real Estate Investment Trust (REIT) engaged in timber and real estate, performance fibers, and wood products. The report covers the three and six months ended June 30, 2005. As of July 22, 2005, there were 50,465,047 common shares outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales decreased 7.4% year-over-year, primarily due to the absence of a $26 million timber lease rights sale in the second quarter of 2004.
• Discontinued Operations: The Company recorded a significant after-tax loss of $24.1 million in Q2 2005 to write down its Medium-Density Fiberboard (MDF) business in New Zealand to fair market value less cost to sell. This business is now classified as discontinued operations.
• Tax Benefits: Net income was bolstered by $16.7 million in tax benefits from favorable IRS audit settlements (reversing reserves for 1996-1999 tax years). In contrast, the prior year included a $49.7 million tax benefit related to REIT conversion.
• Segment Performance:
  • Timber and Real Estate: Sales and operating income declined due to lower real estate sales volume, though timber prices improved in the Northwest U.S.
  • Performance Fibers: Sales increased 4% year-over-year due to higher prices for cellulose specialties and absorbent materials.
  • Wood Products: Lumber sales increased 8% due to higher prices driven by housing demand and reduced Canadian imports.

Outlook, Risks, and Unusual Items

• Subsequent Event (New Zealand Sale): On July 15, 2005, Rayonier agreed to sell its New Zealand forests (118,000 acres) for approximately $184 million and enter a joint venture to purchase additional assets. The transaction is expected to close in Q4 2005, generating net cash proceeds between $67 million and $83 million and an after-tax gain of $28 million to $38 million.
• Guidance: Q3 2005 income from continuing operations is expected to be comparable to Q2, excluding the $7.2 million Q2 tax benefit. Earnings are expected to exceed Q3 2004 levels due to stronger timber prices and real estate results.
• Dividends: Q4 2005 dividends are expected to remain at the Q3 level of $0.62 per share. Total dividends paid in the first six months were $62.2 million.
• Risks and Contingencies:
  • Environmental: Ongoing litigation regarding contaminated soil disposal in Louisiana; potential PCB contamination in Georgia. Estimated environmental spending is $12 million annually for 2005-2006.
  • Regulatory: Compliance with Cluster Rules for air emissions and water discharges at Performance Fibers mills; restrictions on timber harvesting due to endangered species (e.g., northern spotted owl).
  • Market: Exposure to foreign exchange rates (New Zealand dollar) and commodity prices (fuel oil, natural gas).

Investor Verification Checklist

• Verify the closing status and final proceeds of the New Zealand forest sale and joint venture announced in July 2005.
• Confirm the final resolution of the IRS audit settlements and the timing of expected cash refunds.
• Monitor the progress of the MDF business sale and any additional impairment charges or costs associated with the disposition.
• Review the impact of the American Jobs Creation Act on the repatriation of foreign earnings, expected to be finalized in Q3 2005.
• Assess the status of environmental litigation in Louisiana and Georgia, specifically regarding potential cost recovery claims.