RYN

Rayonier Inc. 10-Q Summary: Period Ended September 30, 2008

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Rayonier Inc., a Real Estate Investment Trust (REIT) engaged in timberland ownership, real estate development, and the manufacturing of performance fibers and wood products. The report covers the three and nine months ended September 30, 2008. The Company operates four reportable segments: Timber, Real Estate, Performance Fibers, and Wood Products. Notably, the Company's New Zealand operations (a joint venture and related log trading) were classified as "Assets Held for Sale" and reported as discontinued operations in August 2008.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total sales decreased 1.3% to $878.2 million for the nine months ended September 30, 2008, compared to $890.0 million in the prior year.
  • Timber: Sales declined 15.4% due to depressed sawlog prices and a weak housing market.
  • Real Estate: Sales decreased 25.7% primarily due to a lack of large development property sales compared to a $47 million sale in Q3 2007.
  • Performance Fibers: Sales increased 9.4% driven by higher prices and strong demand for cellulose specialties.
• Profitability: Net income decreased 22.9% to $107.7 million from $139.8 million in the prior year. This decline was driven by lower earnings in Timber and Real Estate segments and a $9.8 million loss from discontinued operations (New Zealand), compared to a $1.6 million gain in the prior year.
• Cash Flow: Operating cash flow decreased $15.5 million to $248.2 million. Investing cash outflows increased significantly by $224.6 million, primarily due to a $229.5 million acquisition of timberlands in Washington state.
• Liquidity: Cash and cash equivalents dropped from $181.1 million at year-end 2007 to $55.0 million at September 30, 2008, reflecting heavy capital deployment for acquisitions.

Guidance, Outlook, and Risks

• Outlook: Management expects full-year 2008 earnings to be below the prior year due to the weak outlook for sawtimber. Performance Fibers results are expected to improve due to strong demand, offsetting rising raw material and energy costs. Real Estate demand for non-strategic timberlands is anticipated to continue.
• Cash Distribution: Cash available for distribution in 2008 is anticipated to be well above dividend requirements.
• Risks:
  • Credit Markets: Turmoil in credit markets may limit demand for products and increase the cost/availability of financing.
  • Environmental: A consent decree regarding the Jesup mill effluent requires approximately $75 million in capital expenditures over seven years.
  • Employee Relations: Collective bargaining agreements at the Jesup mill expired in June 2008; negotiations are ongoing without an agreement.
  • Market Conditions: Weak housing markets continue to impact sawlog prices and real estate development sales.
• Unusual Items: The Company recognized a $9.8 million loss from discontinued operations related to the New Zealand joint venture. Additionally, a $16.4 million gain was recorded in Other Comprehensive Income due to a postretirement medical plan amendment.

Investor Verification Checklist

• Verify the status of negotiations for the Jesup mill collective bargaining agreement and potential impact of a work stoppage.
• Monitor the $75 million environmental capital expenditure plan for the Jesup mill consent decree.
• Assess the impact of the $229 million timberland acquisition on future debt covenants and interest expense.
• Review the progress of the sale of the New Zealand joint venture and related discontinued operations.
• Track the Company's ability to maintain REIT status and fund distributions given the decline in operating cash flow.