RYN

Rayonier Inc. 10-Q Summary: Period Ended June 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, and the six months ended on that date. Rayonier Inc. operates in three reportable segments: Performance Fibers, Timber and Land, and Wood Products and Trading. The company reported a significant change in operations during this period due to the sale of its New Zealand East Coast timberland operations, which are now classified as discontinued operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Sales for the six months ended June 30, 2002, decreased by $68 million (11%) compared to the prior year. This was primarily driven by the absence of a major land sale in the second quarter of 2001 that contributed $59 million in sales. Excluding that transaction, sales decreased slightly due to lower volumes in Performance Fibers and timber.
• Profitability: Net income for the six months dropped $18 million to $25.6 million. Income from continuing operations fell $17 million, largely due to the missing land sale proceeds and lower timber harvest volumes, partially offset by lower interest expense and corporate costs.
• Discontinued Operations: The company recorded a loss of $0.9 million from discontinued operations for the six months, stemming from the sale of New Zealand East Coast assets. This contrasts with a small profit in the prior year.
• Segment Performance:
  • Performance Fibers: Sales down $31 million due to lower absorbent material prices and volumes.
  • Timber and Land: Sales down $52 million, heavily impacted by the prior year's major land sale. Routine land sales and Northwest U.S. timber volumes improved.
  • Wood Products: Sales up $14 million due to higher lumber volumes and prices, though the segment remained near breakeven.

Outlook, Risks, and Management Commentary

• Guidance: Management expects third-quarter 2002 earnings to be lower than the second quarter, primarily due to seasonal volume declines in Northwest U.S. timber operations.
• Liquidity: The company generated $129 million in operating cash flow for the six months, financing capital expenditures, dividends, and net debt repayments of $82 million. Free Cash Flow was $54 million, down $46 million year-over-year.
• Debt Management: Total debt decreased by $81 million to $768 million. The company refinanced $23.1 million of revenue bonds and entered into an interest rate swap on $50 million of debt to manage interest rate risk.
• Legal and Environmental Risks: A significant contingency exists regarding environmental liabilities from a third-party processor of contaminated soil. A consent decree was vacated in May 2002, leaving the ultimate responsibility for disposal of 150,000 tons of material uncertain. The company cannot estimate a range of possible losses, noting the outcome could have a material adverse effect.
• Market Risks: The company faces exposure to commodity prices, foreign exchange rates (specifically New Zealand dollars), and interest rates, utilizing derivatives to hedge these risks.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final settlement of the New Zealand East Coast sale and the collection of the $52.5 million note receivable.
• Environmental Liability: Monitor developments regarding the vacated consent decree for the contaminated soil processor to assess potential future charges.
• Commodity Pricing: Track trends in fluff pulp and timber prices, which significantly influenced the decline in Performance Fibers and Timber segment revenues.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the EBITDA to interest expense ratio (currently 4.34 to 1) and total debt to EBITDA ratio (currently 2.85 to 1).
• Seasonality: Assess the accuracy of management's forecast regarding seasonal volume declines in the third quarter.