RYN 10-Q Quarterly Report Sept. 30, 2012 | Alphaminr
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RYN 10-Q Quarter ended Sept. 30, 2012

Balance Sheet
Cash Flow
Income Statement
Debt
RAYONIER INC
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10-Q 1 rayonier201210q3q2012.htm FORM 10-Q Rayonier 2012 10Q 3Q2012

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
Commission File Number 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
1301 RIVERPLACE BOULEVARD
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-9100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x

As of October 18, 2012 , there were outstanding 123,205,340 Common Shares of the registrant.


















TABLE OF CONTENTS

i


PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended September 30,
Nine Months Ended September 30,
2012
2011
2012
2011
SALES
$
408,988

$
385,091

$
1,136,694

$
1,100,218

Costs and Expenses
Cost of sales
278,651

266,184

794,519

786,467

Selling and general expenses
15,837

15,762

51,705

48,187

Other operating expense (income), net (Note 15)
1,392

(4,171
)
(5,054
)
(5,580
)
295,880

277,775

841,170

829,074

Equity in income of New Zealand joint venture
66

994

250

3,817

OPERATING INCOME
113,174

108,310

295,774

274,961

Interest expense
(8,253
)
(12,356
)
(36,133
)
(38,300
)
Interest and miscellaneous income, net
234

331

294

935

INCOME BEFORE INCOME TAXES
105,155

96,285

259,935

237,596

Income tax (expense) benefit
(24,595
)
8,624

(56,859
)
(17,822
)
NET INCOME
80,560

104,909

203,076

219,774

OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment
5,373

3,584

3,115

11,314

New Zealand joint venture cash flow hedges
878

(630
)
86

(498
)
Amortization of losses from pension and postretirement plans, net of income tax expense of $1,482, $1,017, $4,332 and $2,871
3,401

2,261

9,943

6,449

Total other comprehensive income
9,652

5,215

13,144

17,265

COMPREHENSIVE INCOME
$
90,212

$
110,124

$
216,220

$
237,039

EARNINGS PER COMMON SHARE (Note 2)
Basic earnings per share
$
0.66

$
0.86

$
1.66

$
1.81

Diluted earnings per share
$
0.62

$
0.84

$
1.58

$
1.75

Dividends per share
$
0.44

$
0.40

$
1.24

$
1.12



See Notes to Condensed Consolidated Financial Statements.

1


RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
September 30, 2012
December 31, 2011
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
215,475

$
78,603

Accounts receivable, less allowance for doubtful accounts of $418 and $399
109,943

95,008

Inventory
Finished goods
95,026

96,261

Work in progress
6,421

5,544

Raw materials
17,337

18,295

Manufacturing and maintenance supplies
2,299

1,898

Total inventory
121,083

121,998

Prepaid and other current assets
78,680

48,893

Total current assets
525,181

344,502

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
1,489,889

1,503,711

PROPERTY, PLANT AND EQUIPMENT
Land
29,021

26,917

Buildings
143,854

140,269

Machinery and equipment
1,412,283

1,355,897

Construction in progress
218,365

96,097

Total property, plant and equipment, gross
1,803,523

1,619,180

Less — accumulated depreciation
(1,173,712
)
(1,157,628
)
Total property, plant and equipment, net
629,811

461,552

INVESTMENT IN JOINT VENTURE (Note 5)
70,189

69,219

OTHER ASSETS
198,798

190,364

TOTAL ASSETS
$
2,913,868

$
2,569,348

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
91,662

$
72,873

Current maturities of long-term debt
41,268

28,110

Accrued taxes
64,722

5,223

Accrued payroll and benefits
25,066

26,846

Accrued interest
17,401

7,044

Accrued customer incentives
9,620

10,369

Other current liabilities
28,398

17,855

Current liabilities for dispositions and discontinued operations (Note 10)
8,929

9,931

Total current liabilities
287,066

178,251

LONG-TERM DEBT
967,785

819,229

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 10)
75,524

80,893

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 12)
140,153

140,623

OTHER NON-CURRENT LIABILITIES
25,374

27,279

COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)


SHAREHOLDERS’ EQUITY
Common Shares, 480,000,000 and 240,000,000 shares authorized, 123,189,001 and 122,035,177 shares issued and outstanding
662,504

630,286

Retained earnings
855,766

806,235

Accumulated other comprehensive loss
(100,304
)
(113,448
)
TOTAL SHAREHOLDERS' EQUITY
1,417,966

1,323,073

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
2,913,868

$
2,569,348



See Notes to Condensed Consolidated Financial Statements.

2


RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

Nine Months Ended September 30,
2012
2011
OPERATING ACTIVITIES
Net income
$
203,076

$
219,774

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization
102,499

101,758

Non-cash cost of real estate sold
3,005

3,108

Stock-based incentive compensation expense
12,212

11,793

Amortization of debt discount/premium
5,367

6,471

Deferred income taxes
(17,688
)
(5,967
)
Amortization of losses from pension and postretirement plans
14,275

9,320

Non-cash adjustments to unrecognized tax benefit liability
—

(16,000
)
Other
(2,701
)
(5,177
)
Changes in operating assets and liabilities:
Receivables
(14,169
)
(24,071
)
Inventories
(646
)
(8,435
)
Accounts payable
(13,326
)
6,346

Income tax receivable/payable
52,189

29,483

All other operating activities
16,416

4,782

Expenditures for dispositions and discontinued operations
(6,867
)
(6,915
)
CASH PROVIDED BY OPERATING ACTIVITIES
353,642

326,270

INVESTING ACTIVITIES
Capital expenditures
(112,015
)
(87,156
)
Purchase of timberlands
(11,632
)
(94,162
)
Jesup mill cellulose specialties expansion (gross purchases of $130,718 and $14,567, net of purchases on account of $25,936 and $6,508)
(104,782
)
(8,059
)
Change in restricted cash
(12,796
)
8,323

Other
4,281

513

CASH USED FOR INVESTING ACTIVITIES
(236,944
)
(180,541
)
FINANCING ACTIVITIES
Issuance of debt
355,000

180,000

Repayment of debt
(198,653
)
(180,000
)
Dividends paid
(152,358
)
(136,563
)
Proceeds from the issuance of common shares
20,732

8,248

Excess tax benefits on stock-based compensation
7,057

4,951

Debt issuance costs
(3,698
)
(2,027
)
Repurchase of common shares
(7,783
)
(7,909
)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
20,297

(133,300
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(123
)
393

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
136,872

12,822

Balance, beginning of year
78,603

349,463

Balance, end of period
$
215,475

$
362,285

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest
$
18,239

$
23,706

Income taxes
$
14,912

$
4,992

Non-cash investing activity:
Capital assets purchased on account
$
52,727

$
16,504



See Notes to Condensed Consolidated Financial Statements.

3


RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)


1.
BASIS OF PRESENTATION
Basis of Presentation
The unaudited condensed consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries ("Rayonier" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). In the opinion of management, these financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 , as filed with the SEC.
Subsequent Events
The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued , and two subsequent events were identified that warranted disclosure. See Note 13 — Debt for additional information.

2.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
Net income
$
80,560

$
104,909

$
203,076

$
219,774

Shares used for determining basic earnings per common share
122,848,705

121,790,059

122,552,910

121,665,644

Dilutive effect of:
Stock options
603,761

689,643

667,960

716,095

Performance and restricted shares
755,884

1,179,047

735,653

1,121,909

Assumed conversion of Senior Exchangeable Notes (a) (b)
3,683,936

1,823,600

3,148,423

1,883,270

Assumed conversion of warrants (a) (b)
2,067,380

117,260

1,443,606

143,182

Shares used for determining diluted earnings per common share
129,959,666

125,599,609

128,548,552

125,530,100

Basic earnings per common share
$
0.66

$
0.86

$
1.66

$
1.81

Diluted earnings per common share
$
0.62

$
0.84

$
1.58

$
1.75

Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
Anti-dilutive shares excluded from the computations of diluted earnings per share:
Stock options, performance and restricted shares
123,217

142,135

261,759

198,594

Assumed exercise of exchangeable note hedges (a)
3,683,936

1,823,600

3,148,423

1,883,270

Total
3,807,153

1,965,735

3,410,182

2,081,864

(a) Upon maturity of the Senior Exchangeable Notes (the "Notes"), Rayonier will not issue additional shares for the full difference between the strike price and the market price due to the offsetting exchangeable note hedges (the "hedges"). However, Accounting Standards Codification 260, Earnings Per Share requires the assumed conversion of the Notes to be included in dilutive shares if the average stock price for the period exceeds the strike prices, while the assumed exercise of the hedges are excluded since they are anti-dilutive. Rayonier will distribute additional shares upon maturity of the warrants if the stock price exceeds the strike prices of $41.50 for the Notes due 2012 and $39.58 for the Notes due 2015. For additional information on the potential dilutive impact of the Senior Exchangeable Notes, warrants and exchangeable note hedges, see Note 11 — Debt in the 2011 Annual Report on Form 10-K and Note 13 — Debt of this Form 10-Q.
(b) The higher number of shares in 2012 was primarily due to an increase in the average stock price from $40.93 for the three months ended September 30, 2011 to $48.13 for the three months ended September 30, 2012 and from $41.14 for the nine months

4

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

ended September 30, 2011 to $45.65 for the nine months ended September 30, 2012 .

3.
INCOME TAXES
Rayonier is a real estate investment trust ("REIT"). In general, only the taxable REIT subsidiaries, whose businesses include the Company's non-REIT qualified activities, are subject to corporate income taxes. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010 and 2012 through 2013. In 2011, the law provided a built-in-gains tax holiday. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries' income and certain property sales.
Unrecognized Tax Benefits
During the third quarter of 2011, the Company received a final examination report from the U.S. Internal Revenue Service ("IRS") regarding Rayonier TRS Holdings Inc. ("TRS") 2009 tax return. As a result, the Company reversed the uncertain tax liability recorded in 2009 relating to the taxability of the alternative fuel mixture credit and recognized a $16 million tax benefit in the third quarter of 2011.
Alternative Fuel Mixture Credit ("AFMC") and Cellulosic Biofuel Producer Credit ("CBPC")
The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. The AFMC is a $.50 per gallon refundable, non-taxable excise tax credit, while the CBPC is a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity's tax liability. Rayonier produces and uses an alternative fuel ("black liquor") at its Jesup, Georgia and Fernandina Beach, Florida Performance Fibers mills, which qualified for both credits. The Company claimed the AFMC on its 2009 tax return.
In the third quarters of 2012 and 2011, management approved the exchange of approximately 22 million gallons and 11 million gallons , respectively, of black liquor previously claimed for the AFMC for the CBPC. The total number of exchange gallons approved year-to-date were 82 million and 41 million for 2012 and 2011, respectively. The third quarter impact of the exchange was $2.6 million and $2.0 million for 2012 and 2011, respectively. The year-to-date impact was $11.7 million and $6.1 million for 2012 and 2011, respectively. For additional information on the AFMC and CBPC, see Note 8 — Income Taxes in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
During the second quarter 2012, Rayonier recognized $3.4 million of interest expense related to the exchange; however, in August, the IRS released guidance stating interest payments are not required for AFMC funds exchanged for the CBPC, based upon the manner of the Company's original claim. As a result, in the third quarter Rayonier reversed the $3.4 million of interest expense previously recorded.
Effective Tax Rate
The Company's effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. The Company's effective tax rates in 2012 were higher than 2011. The change was primarily due to tax benefits received in 2011, including the reversal of the reserve related to the taxability of the AFMC and a $9.3 million benefit associated with the structuring of a transfer of higher and better use properties to the taxable REIT subsidiary from the REIT.

5

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

The tables below reconcile the U.S. statutory rate to the Company's effective tax rate for each period presented (in millions of dollars).
Three Months Ended September 30,
2012
2011
Income tax expense at federal statutory rate
$
37

35.0
%
$
34

35.0
%
REIT income not subject to tax
(6
)
(5.7
)%
(11
)
(11.3
)%
Other
(3
)
(2.9
)%
(4
)
(3.7
)%
Income tax expense before non-routine items
28

26.4
%
19

20.0
%
AFMC for CBPC exchange
(3
)
(3.0
)%
(2
)
(2.1
)%
AFMC reserve reversal
—

—

(16
)
(16.6
)%
Installment note prepayment
—

—

(9
)
(9.3
)%
Built-in gains tax holiday
—

—

(1
)
(1.0
)%
Income tax expense (benefit) as reported
$
25

23.4
%
$
(9
)
(9.0
)%
Nine Months Ended September 30,
2012
2011
Income tax expense at federal statutory rate
$
91

35.0
%
$
83

35.0
%
REIT income not subject to tax
(18
)
(7.0
)%
(25
)
(10.6
)%
Other
(4
)
(1.6
)%
(5
)
(1.9
)%
Income tax expense before non-routine items
69

26.4
%
53

22.5
%
AFMC for CBPC exchange
(12
)
(4.5
)%
(6
)
(2.6
)%
AFMC reserve reversal
—

—

(16
)
(6.7
)%
Installment note prepayment
—

—

(9
)
(3.9
)%
Built-in gains tax holiday
—

—

(4
)
(1.8
)%
Income tax expense as reported
$
57

21.9
%
$
18

7.5
%


4.
RESTRICTED DEPOSITS
In order to qualify for like-kind exchange ("LKE") treatment, the proceeds from certain real estate sales must be deposited with a qualified third-party intermediary. These proceeds are accounted for as restricted cash until suitable replacement property is acquired. In the event that the LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of September 30, 2012 and December 31, 2011 , the Company had $12.8 million and $0 million , respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

5.
JOINT VENTURE INVESTMENT
The Company holds a 26 percent interest in Matariki Forestry Group ("Matariki"), a joint venture ("JV") that owns or leases approximately 0.3 million acres of New Zealand timberlands. In addition to the investment, Rayonier New Zealand Limited ("RNZ"), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the JV forests and operates a log trading business.
Rayonier’s investment in the JV is accounted for using the equity method of accounting. Income from the JV is reported in the Forest Resources segment as operating income since the Company manages the forests, and its JV interest is an extension of the Company’s operations. A portion of Rayonier’s equity method investment is recorded at historical cost which generates a difference between the book value of the Company’s investment and its proportionate share of the JV’s net assets. The difference represents the Company’s unrecognized gain from RNZ’s sale of timberlands to the JV in 2005. The deferred gain is recognized on a straight-line basis over the estimated number of years the JV expects to harvest the timberlands.

6

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

6.
SHAREHOLDERS’ EQUITY
An analysis of shareholders’ equity for the nine months ended September 30, 2012 and the year ended December 31, 2011 is shown below (share amounts not in thousands):
Common Shares
Retained
Earnings
Accumulated Other Comprehensive Loss
Shareholders’
Equity
Shares
Amount
Balance, December 31, 2010
121,023,140

$
602,882

$
717,058

$
(68,358
)
$
1,251,582

Net income
—

—

276,005

—

276,005

Dividends ($1.52 per share)
—

—

(186,828
)
—

(186,828
)
Issuance of shares under incentive stock plans
1,220,731

13,451

—

—

13,451

Stock-based compensation
—

16,181

—

—

16,181

Excess tax benefit on stock-based compensation
—

5,681

—

—

5,681

Repurchase of common shares
(208,694
)
(7,909
)
—

—

(7,909
)
Net loss from pension and postretirement plans
—

—

—

(46,263
)
(46,263
)
Foreign currency translation adjustment
—

—

—

3,546

3,546

New Zealand joint venture cash flow hedges
—

—

—

(2,373
)
(2,373
)
Balance, December 31, 2011
122,035,177

$
630,286

$
806,235

$
(113,448
)
$
1,323,073

Net income
—

—

203,076

—

203,076

Dividends ($1.24 per share)
—

—

(153,545
)
—

(153,545
)
Issuance of shares under incentive stock plans
1,323,581

20,732

—

—

20,732

Stock-based compensation
—

12,212

—

—

12,212

Excess tax benefit on stock-based compensation
—

7,057

—

—

7,057

Repurchase of common shares
(169,757
)
(7,783
)
—

—

(7,783
)
Amortization of losses from pension and postretirement plans
—

—

—

9,943

9,943

Foreign currency translation adjustment
—

—

—

3,115

3,115

New Zealand joint venture cash flow hedges
—

—

—

86

86

Balance, September 30, 2012
123,189,001

$
662,504

$
855,766

$
(100,304
)
$
1,417,966

7.
SEGMENT AND GEOGRAPHICAL INFORMATION
Rayonier operates in four reportable business segments: Forest Resources, Real Estate, Performance Fibers and Wood Products. Forest Resources sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are reported in "Other Operations." Sales between operating segments are made based on estimated fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.
Operating income (loss) as presented in the Condensed Consolidated Statements of Income and Comprehensive Income is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations.

7

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:
September 30,
December 31,
ASSETS
2012
2011
Forest Resources
$
1,623,370

$
1,603,515

Real Estate
110,582

102,682

Performance Fibers
840,082

646,447

Wood Products
18,716

21,264

Other Operations
23,424

24,576

Corporate and other
297,694

170,864

Total
$
2,913,868

$
2,569,348

Three Months Ended
September 30,
Nine Months Ended
September 30,
SALES
2012
2011
2012
2011
Forest Resources
$
59,853

$
57,265

$
164,711

$
162,482

Real Estate
13,043

32,177

37,369

57,945

Performance Fibers
288,221

255,457

793,586

739,426

Wood Products
22,825

16,492

65,864

50,239

Other Operations
26,293

25,950

76,702

94,869

Intersegment Eliminations (a)
(1,247
)
(2,250
)
(1,538
)
(4,743
)
Total
$
408,988

$
385,091

$
1,136,694

$
1,100,218

(a)
Intersegment eliminations primarily reflect sales from our Forest Resources segment to our Performance Fibers segment.
Three Months Ended
September 30,
Nine Months Ended
September 30,
OPERATING INCOME (LOSS)
2012
2011
2012
2011
Forest Resources
$
11,184

$
10,792

$
27,438

$
33,681

Real Estate
8,420

28,077

20,897

40,458

Performance Fibers
101,455

74,897

265,812

221,709

Wood Products
1,618

(740
)
6,669

(1,274
)
Other Operations
(419
)
1,122

(201
)
955

Corporate and other
(9,084
)
(5,838
)
(24,841
)
(20,568
)
Total
$
113,174

$
108,310

$
295,774

$
274,961


Three Months Ended
September 30,
Nine Months Ended
September 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2012
2011
2012
2011
Forest Resources
$
18,793

$
16,614

$
52,662

$
47,866

Real Estate
1,288

5,677

4,733

10,598

Performance Fibers
15,077

15,592

41,577

40,089

Wood Products
787

689

2,369

2,344

Corporate and other
368

323

1,158

861

Total
$
36,313

$
38,895

$
102,499

$
101,758


8

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

8.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
A three-level hierarchy that prioritizes the inputs used to measure fair value was established in the Accounting Standards Codification as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy of financial instruments held by the Company at September 30, 2012 and December 31, 2011 , using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:
September 30, 2012
December 31, 2011
Asset (liability)
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Level 1
Level 2
Level 1
Level 2
Cash and cash equivalents
$
215,475

$
215,475

$
—

$
78,603

$
78,603

$
—

Restricted cash
12,796

12,796

—

—

—

—

Current maturities of long-term debt
(41,268
)
—

(57,993
)
(28,110
)
—

(29,319
)
Long-term debt
(967,785
)
—

(1,179,011
)
(819,229
)
—

(994,851
)
Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents and Restricted cash — The carrying amount is equal to fair market value .
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities.
Variable Interest Entity
Rayonier holds a variable interest in a bankruptcy-remote, limited liability subsidiary ("special-purpose entity") which was created in 2004 when Rayonier monetized a $25.0 million installment note and letter of credit received in connection with a timberland sale. The Company contributed the note and a letter of credit to the special-purpose entity and using the installment note and letter of credit as collateral, the special-purpose entity issued $22.6 million of 15-year Senior Secured Notes and remitted cash of $22.6 million to the Company. There are no restrictions that relate to the transferred financial assets. Rayonier maintains a $2.6 million interest in the entity and receives immaterial cash payments equal to the excess of interest received on the installment note over the interest paid on the Senior Secured Notes. The Company's interest is recorded at fair value and is included in "Other Assets" in the Condensed Consolidated Balance Sheets. In addition, the Company calculated and recorded a de minimus guarantee liability to reflect its obligation of up to $2.3 million under a make-whole agreement pursuant to which it guaranteed certain obligations of the entity. This guarantee obligation is also collateralized by the letter of credit. The Company's interest in the entity, together with the make-whole agreement, represents the maximum exposure to loss as a result of the Company's involvement with the special-purpose entity. Upon maturity of the Senior Secured Notes in 2019 and termination of the special-purpose entity, Rayonier will receive the remaining $2.6 million of cash. The Company determined, based upon an analysis under the variable interest entity guidance, that it does not have the power to direct activities that most significantly impact the entity's economic success. Therefore, Rayonier is not the primary beneficiary and is not required to consolidate the entity.
Assets measured at fair value on a recurring basis are summarized below:
Asset
Carrying Value at
September 30, 2012
Level 2
Carrying Value at
December 31, 2011
Level 2
Investment in special-purpose entity
$
2,676

$
2,676

$
2,690

$
2,690

The fair value of the investment in the special-purpose entity is determined by summing the discounted value of future principal and interest payments that Rayonier will receive from the special-purpose entity. The interest rate of a similar instrument is used

9

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

to determine the discounted value of the payments.

9.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of September 30, 2012 , the following financial guarantees were outstanding:
Financial Commitments
Maximum Potential
Payment
Carrying Amount
of Liability
Standby letters of credit (a)
$
18,955

$
15,000

Guarantees (b)
2,254

43

Surety bonds (c)
7,164

1,389

Total financial commitments
$
28,373

$
16,432

(a)
Approximately $15 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit will expire at various dates during 2012 and 2013 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At September 30, 2012 , the Company has a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(c)
Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates between 2012 and 2014 and are expected to be renewed as required.
10.
LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
An analysis of the liabilities for dispositions and discontinued operations follows:
September 30,
December 31,
2012
2011
Balance, beginning of period
$
90,824

$
93,160

Expenditures charged to liabilities
(6,867
)
(9,209
)
Increase to liabilities
496

6,873

Balance, end of period
84,453

90,824

Less: Current portion
(8,929
)
(9,931
)
Non-current portion
$
75,524

$
80,893

The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 30, 2012, the estimate of this amount could range up to $29 million, allocable over several of the applicable sites, and arises from uncertainty over the availability, feasibility or effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
The Company believes established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions for these sites vary, but could include on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.

11.
CONTINGENCIES
Rayonier is engaged in various legal actions, including certain environmental proceedings, and has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flow.

10

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

12.
EMPLOYEE BENEFIT PLANS
The Company has four qualified non-contributory defined benefit pension plans covering a significant majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans . Currently, all qualified plans are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recognized during the stated periods are shown in the following tables:
Pension
Postretirement
Three Months Ended
September 30,
Three Months Ended
September 30,
2012
2011
2012
2011
Components of Net Periodic Benefit Cost
Service cost
$
2,102

$
1,695

$
227

$
99

Interest cost
4,321

4,522

242

257

Expected return on plan assets
(6,369
)
(6,455
)
—

—

Amortization of prior service cost
327

340

6

49

Amortization of losses
4,394

2,593

156

296

Net periodic benefit cost
$
4,775

$
2,695

$
631

$
701

Pension
Postretirement
Nine Months Ended September 30,
Nine Months Ended September 30,
2012
2011
2012
2011
Components of Net Periodic Benefit Cost
Service cost
$
6,143

$
5,086

$
664

$
463

Interest cost
12,630

13,566

706

729

Expected return on plan assets
(18,618
)
(19,366
)
—

—

Amortization of prior service cost
956

1,020

18

93

Amortization of losses
12,846

7,779

455

428

Net periodic benefit cost
$
13,957

$
8,085

$
1,843

$
1,713

In 2012, the Company has no mandatory pension contribution requirements and does not expect to make any discretionary contributions.

13.
DEBT
In March 2012 , Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022 . Approximately $150 million of the proceeds from these notes were used to repay borrowings outstanding under the Company's revolving credit facility. The Company had $431 million of available borrowing capacity under the revolving credit facility at September 30, 2012 .
As of September 30, 2012 , the $172.5 million 4.50% Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending December 31, 2012 . Per the indenture, in order for the notes to become exchangeable, the Company's stock price must exceed 130 percent of the exchange price for 20 trading days during a period of 30 consecutive trading days as of the last day of the quarter. Of the $172.5 million principal, $131.2 million remained classified as long-term debt due to the ability and intent of the Company to refinance it on a long-term basis.
An asset sales covenant in the Rayonier Forest Resources, L.P. ("RFR") $112.5 million installment note agreement requires the Company, subject to certain exceptions, to either reinvest cumulative timberland sale proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments or, once the amount of excess proceeds not reinvested

11

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

exceeds $50 million , to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. During April 2012 , the excess proceeds exceeded the $50 million limit and as a result, repayment of $59.9 million was offered to the note holders through May 15, 2012 , at which time they declined and the excess proceeds were reset to zero .
There were no other significant changes to the Company's outstanding debt as reported in Note 11 — Debt of the Company's 2011 Annual Report on Form 10-K.
Subsequent Events
In October 2012, the Company negotiated amendments to the existing revolving credit facility. The amended and restated facility provides for improved pricing, with the borrowing rate decreasing from LIBOR plus 105 basis points to LIBOR plus 97.5 basis points . The facility fee decreased 5 points from 20 basis points to 15 basis points . The revised agreement also provides additional borrowing capacity through revision of the leverage ratio to permit debt of Rayonier Inc. and its subsidiaries up to 65 percent of consolidated net worth, plus the amount of consolidated debt. Previously, debt was limited to four times EBITDA. In addition, the Company can now transfer assets to any subsidiary, and any subsidiary can now transfer assets to other subsidiaries or to the Company. An additional covenant was added to limit debt at subsidiaries (excluding Rayonier Operating Company LLC and TRS, which are borrowers under the agreement) to 15 percent of Consolidated Net Tangible Assets. Also, the amended and restated credit agreement removed RFR as a borrower, but also eliminated specific negative covenants relating to RFR under this facility. The agreement also eliminated all requirements for subsidiary guarantors, other than cross-guarantees of the borrowers. As a result, these guarantors were also released from the 3.75% Senior Notes due 2022 issued by Rayonier Inc., leaving TRS and Rayonier Operating Company LLC as the remaining guarantors.
The 3.75% Senior Exchangeable Notes due 2012 (the "Notes") matured in October 2012 and the outstanding principal balance of $300 million was paid in cash, financed through borrowings on the Company's revolving credit facility. The exchangeable note hedges also matured and the associated shares were used to pay the excess exchange value of 2,221,056 shares of Rayonier stock. As a result, there was no impact on the number of shares outstanding. The available borrowing capacity under the credit facility immediately after repayment of the Notes was $131 million . The Company expects to refinance this $300 million borrowing on a long-term basis prior to year-end.
Warrants sold in conjunction with the issuance of the Notes and hedges remain outstanding and have maturity dates in first quarter 2013. The Company expects to settle the warrants in shares. For information regarding the dilutive effect of the assumed conversion of the warrants, refer to Note 2 — Earnings per Share .
See Note 11 — Debt of the Company's 2011 Annual Report on Form 10-K for additional information on the Notes, hedges and warrants.

14.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated Other Comprehensive Loss was comprised of the following:
September 30, 2012
December 31, 2011
Foreign currency translation adjustments
$
37,592

$
34,477

Joint venture cash flow hedges
(3,755
)
(3,841
)
Unrecognized losses of employee benefit plans, net of tax
(134,141
)
(144,084
)
Total
$
(100,304
)
$
(113,448
)


12

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

15.
OTHER OPERATING (EXPENSE) INCOME, NET
Other operating (expense) income, net was comprised of the following:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
Lease income, primarily for hunting
$
1,357

$
1,369

$
6,263

$
4,563

Other non-timber income
433

567

2,324

1,551

Foreign currency (loss) gain
(979
)
1,017

(1,165
)
236

Loss on sale or disposal of property, plant & equipment
(1,176
)
(270
)
(2,908
)
(1,769
)
Insurance proceeds
—

1,890

2,319

1,890

Miscellaneous income (expense), net
(1,027
)
(402
)
(1,779
)
(891
)
Total
$
(1,392
)
$
4,171

$
5,054

$
5,580




13

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

16.
CONSOLIDATING FINANCIAL STATEMENTS
The consolidating financial information below follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation, and the allocation of certain expenses of Rayonier Inc. incurred for the benefit of its subsidiaries.
In October 2007 , Rayonier TRS Holdings Inc. ("TRS") issued $300 million of 3.75% Senior Exchangeable Notes due 2012 , and in August 2009 TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015 . The notes for both transactions are fully and unconditionally guaranteed by Rayonier Inc. as the Parent Guarantor and Rayonier Operating Company LLC ("ROC") as the Subsidiary Guarantor. In connection with these exchangeable notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered .

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
381,400

$
43,720

$
(16,132
)
$
408,988

Costs and Expenses
Cost of sales
—

—

—

266,987

28,282

(16,618
)
278,651

Selling and general expenses
—

2,762

—

12,717

358

—

15,837

Other operating expense (income), net
—

730

—

2,335

(1,681
)
8

1,392

—

3,492

—

282,039

26,959

(16,610
)
295,880

Equity in income (loss) of New Zealand joint venture
—

—

—

169

(103
)
—

66

OPERATING (LOSS) INCOME
—

(3,492
)
—

99,530

16,658

478

113,174

Interest (expense) income
(3,136
)
(196
)
(10,244
)
5,587

(264
)
—

(8,253
)
Interest and miscellaneous income (expense), net
1,630

1,594

(980
)
(3,872
)
1,862

—

234

Equity in income from subsidiaries
82,066

85,241

73,635

—

—

(240,942
)
—

INCOME BEFORE INCOME TAXES
80,560

83,147

62,411

101,245

18,256

(240,464
)
105,155

Income tax (expense) benefit
—

(1,081
)
4,096

(27,610
)
—

—

(24,595
)
NET INCOME
80,560

82,066

66,507

73,635

18,256

(240,464
)
80,560

OTHER COMPREHENSIVE INCOME
9,652

9,652

328

328

6,143

(16,451
)
9,652

COMPREHENSIVE INCOME
$
90,212

$
91,718

$
66,835

$
73,963

$
24,399

$
(256,915
)
$
90,212


14

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2011
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
342,937

$
61,463

$
(19,309
)
$
385,091

Costs and Expenses
Cost of sales
—

—

—

254,969

32,376

(21,161
)
266,184

Selling and general expenses
—

2,566

—

12,584

612

—

15,762

Other operating expense (income), net
—

45

—

(2,606
)
(1,610
)
—

(4,171
)
—

2,611

—

264,947

31,378

(21,161
)
277,775

Equity in income of New Zealand joint venture
—

—

—

200

794

—

994

OPERATING (LOSS) INCOME
—

(2,611
)
—

78,190

30,879

1,852

108,310

Interest (expense) income
—

(440
)
(12,139
)
328

(105
)
—

(12,356
)
Interest and miscellaneous income (expense), net
—

1,332

(1,121
)
(5,053
)
5,173

—

331

Equity in income from subsidiaries
104,909

106,350

76,971

—

—

(288,230
)
—

INCOME BEFORE INCOME TAXES
104,909

104,631

63,711

73,465

35,947

(286,378
)
96,285

Income tax benefit
—

278

4,840

3,506

—

—

8,624

NET INCOME
104,909

104,909

68,551

76,971

35,947

(286,378
)
104,909

OTHER COMPREHENSIVE INCOME
5,215

5,215

15

15

3,090

(8,335
)
5,215

COMPREHENSIVE INCOME
$
110,124

$
110,124

$
68,566

$
76,986

$
39,037

$
(294,713
)
$
110,124


15

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
1,062,065

$
125,475

$
(50,846
)
$
1,136,694

Costs and Expenses





Cost of sales
—

—

—

764,886

81,816

(52,183
)
794,519

Selling and general expenses
—

7,977

—

41,296

2,432

—

51,705

Other operating expense  (income), net
—

742

—

1,517

(8,473
)
1,160

(5,054
)
—

8,719

—

807,699

75,775

(51,023
)
841,170

Equity in income (loss) of New Zealand joint venture
—

—

—

507

(257
)
—

250

OPERATING (LOSS) INCOME
—

(8,719
)
—

254,873

49,443

177

295,774

Interest (expense) income
(7,502
)
(646
)
(30,713
)
4,639

(1,911
)
—

(36,133
)
Interest and miscellaneous income (expense), net
5,086

4,580

(3,022
)
(11,911
)
5,561

—

294

Equity in income from subsidiaries
205,492

211,635

179,787

—

—

(596,914
)
—

INCOME BEFORE INCOME TAXES
203,076

206,850

146,052

247,601

53,093

(596,737
)
259,935

Income tax (expense) benefit
—

(1,358
)
12,313

(67,814
)
—

—

(56,859
)
NET INCOME
203,076

205,492

158,365

179,787

53,093

(596,737
)
203,076

OTHER COMPREHENSIVE INCOME
$
13,144

$
13,144

$
1,128

$
1,128

$
2,719

$
(18,119
)
$
13,144

COMPREHENSIVE INCOME
$
216,220

$
218,636

$
159,493

$
180,915

$
55,812

$
(614,856
)
$
216,220


16

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2011
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
1,002,015

$
147,884

$
(49,681
)
$
1,100,218

Costs and Expenses
Cost of sales
—

—

—

750,375

90,630

(54,538
)
786,467

Selling and general expenses
—

7,497

—

38,639

2,051

—

48,187

Other operating expense (income), net
—

130

—

(406
)
(5,304
)
—

(5,580
)
—

7,627

—

788,608

87,377

(54,538
)
829,074

Equity in income of New Zealand joint venture
—

—

—

561

3,256

—

3,817

OPERATING (LOSS) INCOME
—

(7,627
)
—

213,968

63,763

4,857

274,961

Interest (expense) income
—

(831
)
(37,350
)
73

(192
)
—

(38,300
)
Interest and miscellaneous income (expense), net
—

3,972

(3,313
)
(15,069
)
15,345

—

935

Equity in income from subsidiaries
219,774

224,142

166,190

—

—

(610,106
)
—

INCOME BEFORE INCOME TAXES
219,774

219,656

125,527

198,972

78,916

(605,249
)
237,596

Income tax benefit (expense)
—

118

14,842

(32,782
)
—

—

(17,822
)
NET INCOME
219,774

219,774

140,369

166,190

78,916

(605,249
)
219,774

OTHER COMPREHENSIVE INCOME
$
17,265

$
17,265

$
524

$
524

$
10,919

$
(29,232
)
$
17,265

COMPREHENSIVE INCOME
$
237,039

$
237,039

$
140,893

$
166,714

$
89,835

$
(634,481
)
$
237,039






17

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings
Inc. (Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
76,809

$
59,546

$
46,287

$
9,130

$
23,703

$
—

$
215,475

Accounts receivable, less allowance for doubtful accounts
11

234

—

106,534

3,164

—

109,943

Inventory
—

—

—

139,521

—

(18,438
)
121,083

Intercompany interest receivable
—

—

—

—

3,153

(3,153
)
—

Prepaid and other current assets
—

831

709

67,984

9,156

—

78,680

Total current assets
76,820

60,611

46,996

323,169

39,176

(21,591
)
525,181

TIMBER AND TIMBERLANDS,
NET OF DEPLETION AND AMORTIZATION
—

—

—

39,677

1,448,418

1,794

1,489,889

NET PROPERTY, PLANT AND EQUIPMENT
—

2,408

—

624,185

3,218

—

629,811

INVESTMENT IN JOINT VENTURE
—

—

—

(10,741
)
80,930

—

70,189

INVESTMENT IN SUBSIDIARIES
1,449,432

1,638,041

1,289,147

—

—

(4,376,620
)
—

INTERCOMPANY NOTES RECEIVABLE
220,188

—

19,642

—

—

(239,830
)
—

OTHER ASSETS
3,500

26,663

4,228

690,362

18,167

(544,122
)
198,798

TOTAL ASSETS
$
1,749,940

$
1,727,723

$
1,360,013

$
1,666,652

$
1,589,909

$
(5,180,369
)
$
2,913,868

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
1,025

$
1

$
86,455

$
4,181

$
—

$
91,662

Current maturities of long-term debt
—

—

41,268

—

—

—

41,268

Accrued taxes
—

1,531

—

56,995

6,196

—

64,722

Accrued payroll and benefits
—

13,994

—

9,224

1,848

—

25,066

Accrued interest
6,974

461

8,734

699

533

—

17,401

Accrued customer incentives
—

—

—

9,620

—

—

9,620

Other current liabilities
—

2,434

—

8,413

17,551

—

28,398

Current liabilities for dispositions and discontinued operations
—

—

—

8,929

—

—

8,929

Total current liabilities
6,974

19,445

50,003

180,335

30,309

—

287,066

LONG-TERM DEBT
325,000

—

565,878

—

76,907

—

967,785

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

—

75,524

—

—

75,524

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

114,586

—

25,567

—

—

140,153

OTHER NON-CURRENT LIABILITIES
—

18,058

—

6,736

580

—

25,374

INTERCOMPANY PAYABLE
—

126,202

—

89,343

219,632

(435,177
)
—

TOTAL LIABILITIES
331,974

278,291

615,881

377,505

327,428

(435,177
)
1,495,902

TOTAL SHAREHOLDERS’ EQUITY
1,417,966

1,449,432

744,132

1,289,147

1,262,481

(4,745,192
)
1,417,966

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,749,940

$
1,727,723

$
1,360,013

$
1,666,652

$
1,589,909

$
(5,180,369
)
$
2,913,868


18

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2011
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings
Inc. (Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
—

$
8,977

$
59,976

$
7,398

$
2,252

$
—

$
78,603

Accounts receivable, less allowance for doubtful accounts
—

3

—

94,399

606

—

95,008

Inventory
—

—

—

133,300

—

(11,302
)
121,998

Intercompany interest receivable
—

—

—

—

3,848

(3,848
)
—

Prepaid and other current assets
—

2,328

808

36,937

8,820

—

48,893

Total current assets
—

11,308

60,784

272,034

15,526

(15,150
)
344,502

TIMBER AND TIMBERLANDS,
NET OF DEPLETION AND AMORTIZATION
—

—

—

39,824

1,462,027

1,860

1,503,711

NET PROPERTY, PLANT AND EQUIPMENT
—

2,551

—

456,754

2,247

—

461,552

INVESTMENT IN JOINT VENTURE
—

—

—

(11,006
)
80,225

—

69,219

INVESTMENT IN SUBSIDIARIES
1,238,661

1,490,444

1,156,896

—

—

(3,886,001
)
—

INTERCOMPANY NOTES RECEIVABLE
204,420

—

19,073

—

—

(223,493
)
—

OTHER ASSETS
—

26,850

6,491

702,087

6,856

(551,920
)
190,364

TOTAL ASSETS
$
1,443,081

$
1,531,153

$
1,243,244

$
1,459,693

$
1,566,881

$
(4,674,704
)
$
2,569,348

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
1,801

$
10

$
69,648

$
1,414

$
—

$
72,873

Current maturities of long-term debt
—

—

28,110

—

—

—

28,110

Accrued taxes
—

(27
)
—

3,934

1,316

—

5,223

Accrued payroll and benefits
—

13,810

—

10,563

2,473

—

26,846

Accrued interest
8

246

5,442

739

609

—

7,044

Accrued customer incentives
—

—

—

10,369

—

—

10,369

Other current liabilities
—

1,886

—

9,199

6,770

—

17,855

Current liabilities for dispositions and discontinued operations
—

—

—

9,931

—

—

9,931

Total current liabilities
8

17,716

33,562

114,383

12,582

—

178,251

LONG-TERM DEBT
120,000

30,000

580,647

—

88,582

—

819,229

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

—

80,893

—

—

80,893

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

112,904

—

27,719

—

—

140,623

OTHER NON-CURRENT LIABILITIES
—

20,210

—

6,396

673

—

27,279

INTERCOMPANY PAYABLE
—

111,662

—

73,406

203,208

(388,276
)
—

TOTAL LIABILITIES
120,008

292,492

614,209

302,797

305,045

(388,276
)
1,246,275

TOTAL SHAREHOLDERS’ EQUITY
1,323,073

1,238,661

629,035

1,156,896

1,261,836

(4,286,428
)
1,323,073

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,443,081

$
1,531,153

$
1,243,244

$
1,459,693

$
1,566,881

$
(4,674,704
)
$
2,569,348


19

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
23,916

$
105,407

$
12,000

$
191,883

$
125,524

$
(105,088
)
$
353,642

INVESTING ACTIVITIES
Capital expenditures
—

(240
)
—

(84,259
)
(27,516
)
—

(112,015
)
Purchase of timberlands
—

—

—

—

(11,632
)
—

(11,632
)
Jesup mill cellulose specialties expansion
—

—

—

(104,782
)
—

—

(104,782
)
Change in restricted cash
—

—

—

—

(12,796
)
—

(12,796
)
Investment in Subsidiaries
—

—

(5,536
)
—

—

5,536

—

Other
—

(69
)
—

1,979

2,371

—

4,281

CASH USED FOR INVESTING ACTIVITIES
—

(309
)
(5,536
)
(187,062
)
(49,573
)
5,536

(236,944
)
FINANCING ACTIVITIES
Issuance of debt
325,000

—

15,000

—

15,000

—

355,000

Repayment of debt
(120,000
)
(30,000
)
(23,153
)
—

(25,500
)
—

(198,653
)
Dividends paid
(152,358
)
—

—

—

—

—

(152,358
)
Proceeds from the issuance of common shares
20,732

—

—

—

—

—

20,732

Excess tax benefits on stock-based compensation
—

—

—

7,057

—

—

7,057

Debt issuance costs
(3,698
)
—

—

—

—

—

(3,698
)
Repurchase of common shares
(7,783
)
—

—

—

—

—

(7,783
)
Issuance of intercompany notes
(9,000
)
—

—

—

9,000

—

—

Intercompany distributions
—

(24,529
)
(12,000
)
(10,023
)
(53,000
)
99,552

—

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
52,893

(54,529
)
(20,153
)
(2,966
)
(54,500
)
99,552

20,297

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

—

(123
)
—

—

(123
)
CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
76,809

50,569

(13,689
)
1,732

21,451

—

136,872

Balance, beginning of year
—

8,977

59,976

7,398

2,252

—

78,603

Balance, end of period
$
76,809

$
59,546

$
46,287

$
9,130

$
23,703

$
—

$
215,475



20

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2011
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Subsidiaries of
Rayonier TRS
Holdings Inc.
(Non-
guarantors)
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
136,224

$
147,352

$
15,000

$
165,221

$
136,241

$
(273,768
)
$
326,270

INVESTING ACTIVITIES
Capital expenditures
—

(16
)
—

(60,950
)
(26,190
)
—

(87,156
)
Purchase of timberlands
—

—

—

(5,638
)
(88,524
)
—

(94,162
)
Jesup mill cellulose specialties expansion
—

—

—

(8,059
)
—

—

(8,059
)
Change in restricted cash
—

—

—

—

8,323

—

8,323

Investment in Subsidiaries
—

(73,736
)
68,613

—

—

5,123

—

Other
—

—

—

584

(71
)
—

513

CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES
—

(73,752
)
68,613

(74,063
)
(106,462
)
5,123

(180,541
)
FINANCING ACTIVITIES
Issuance of debt
—

75,000

—

—

105,000

—

180,000

Repayment of debt
—

—

(75,000
)
—

(105,000
)
—

(180,000
)
Dividends paid
(136,563
)
—

—

—

—

—

(136,563
)
Proceeds from the issuance of common shares
8,248

—

—

—

—

—

8,248

Excess tax benefits on stock-based compensation
—

—

—

4,951

—

—

4,951

Debt issuance costs
—

(675
)
(676
)
—

(676
)
—

(2,027
)
Repurchase of common shares
(7,909
)
—

—

—

—

—

(7,909
)
Intercompany distributions
—

(135,309
)
(14,760
)
(87,508
)
(31,068
)
268,645

—

CASH USED FOR FINANCING ACTIVITIES
(136,224
)
(60,984
)
(90,436
)
(82,557
)
(31,744
)
268,645

(133,300
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

—

393

—

—

393

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
—

12,616

(6,823
)
8,994

(1,965
)
—

12,822

Balance, beginning of year
—

29,759

283,258

1,280

35,166

—

349,463

Balance, end of period
$
—

$
42,375

$
276,435

$
10,274

$
33,201

$
—

$
362,285



21

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

In March 2012 , Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022 . The notes are fully and unconditionally guaranteed by the following subsidiaries of Rayonier Inc.: ROC, Rayonier Louisiana Timberlands LLC, Rayonier TRS Holdings Inc. and substantially all domestic subsidiaries of TRS Holdings Inc. In connection with these notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered .
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
353,967

$
71,153

$
(16,132
)
$
408,988

Costs and Expenses
Cost of sales
—

242,773

52,496

(16,618
)
278,651

Selling and general expenses
—

12,837

3,000

—

15,837

Other operating expense (income), net
—

2,054

(671
)
9

1,392

—

257,664

54,825

(16,609
)
295,880

Equity in income of New Zealand joint venture
—

—

66

—

66

OPERATING INCOME
—

96,303

16,394

477

113,174

Interest expense
(3,136
)
(4,853
)
(264
)
—

(8,253
)
Interest and miscellaneous income (expense), net
1,630

(3,261
)
1,865

—

234

Equity in income from subsidiaries
82,066

18,527

—

(100,593
)
—

INCOME BEFORE INCOME TAXES
80,560

106,716

17,995

(100,116
)
105,155

Income tax (expense) benefit
—

(24,650
)
55

—

(24,595
)
NET INCOME
80,560

82,066

18,050

(100,116
)
80,560

OTHER COMPREHENSIVE INCOME
9,652

9,652

6,250

(15,902
)
9,652

COMPREHENSIVE INCOME
$
90,212

$
91,718

$
24,300

$
(116,018
)
$
90,212


22

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 2011
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
318,523

$
85,878

$
(19,310
)
$
385,091

Costs and Expenses
Cost of sales
—

232,447

54,900

(21,163
)
266,184

Selling and general expenses
—

12,372

3,390

—

15,762

Other operating income, net
—

(1,367
)
(2,804
)
—

(4,171
)
—

243,452

55,486

(21,163
)
277,775

Equity in income of New Zealand joint venture
—

—

994

—

994

OPERATING INCOME
—

75,071

31,386

1,853

108,310

Interest expense
—

(12,250
)
(106
)
—

(12,356
)
Interest and miscellaneous (expense) income, net
—

(4,846
)
5,177

—

331

Equity in income from subsidiaries
104,909

37,963

—

(142,872
)
—

INCOME BEFORE INCOME TAXES
104,909

95,938

36,457

(141,019
)
96,285

Income tax benefit (expense)
—

8,971

(347
)
—

8,624

NET INCOME
104,909

104,909

36,110

(141,019
)
104,909

OTHER COMPREHENSIVE INCOME
5,215

5,215

2,955

(8,170
)
5,215

COMPREHENSIVE INCOME
$
110,124

$
110,124

$
39,065

$
(149,189
)
$
110,124


23

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
981,902

$
205,638

$
(50,846
)
$
1,136,694

Costs and Expenses

Cost of sales
—

694,308

152,394

(52,183
)
794,519

Selling and general expenses
—

40,376

11,329

—

51,705

Other operating expense (income), net
—

473

(6,687
)
1,160

(5,054
)
—

735,157

157,036

(51,023
)
841,170

Equity in income of New Zealand joint venture
—

—

250

—

250

OPERATING INCOME
—

246,745

48,852

177

295,774

Interest expense
(7,502
)
(26,720
)
(1,911
)
—

(36,133
)
Interest and miscellaneous income (expense), net
5,086

(10,370
)
5,578

—

294

Equity in income from subsidiaries
205,492

52,196

—

(257,688
)
—

INCOME BEFORE INCOME TAXES
203,076

261,851

52,519

(257,511
)
259,935

Income tax expense
—

(56,359
)
(500
)
—

(56,859
)
NET INCOME
203,076

205,492

52,019

(257,511
)
203,076

OTHER COMPREHENSIVE INCOME
13,144

13,144

3,201

(16,345
)
13,144

COMPREHENSIVE INCOME
$
216,220

$
218,636

$
55,220

$
(273,856
)
$
216,220


24

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 2011
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
909,051

$
240,848

$
(49,681
)
$
1,100,218

Costs and Expenses
Cost of sales
—

665,806

175,199

(54,538
)
786,467

Selling and general expenses
—

36,926

11,261

—

48,187

Other operating expense (income), net
—

487

(6,067
)
—

(5,580
)
—

703,219

180,393

(54,538
)
829,074

Equity in income of New Zealand joint venture
—

—

3,817

—

3,817

OPERATING INCOME
—

205,832

64,272

4,857

274,961

Interest expense
—

(38,108
)
(192
)
—

(38,300
)
Interest and miscellaneous (expense) income, net
—

(14,432
)
15,367

—

935

Equity in income from subsidiaries
219,774

83,665

—

(303,439
)
—

INCOME BEFORE INCOME TAXES
219,774

236,957

79,447

(298,582
)
237,596

Income tax expense
—

(17,183
)
(639
)
—

(17,822
)
NET INCOME
219,774

219,774

78,808

(298,582
)
219,774

OTHER COMPREHENSIVE INCOME
17,265

17,265

10,816

(28,081
)
17,265

COMPREHENSIVE INCOME
$
237,039

$
237,039

$
89,624

$
(326,663
)
$
237,039


25

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING BALANCE SHEETS
As of September 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
76,809

$
100,808

$
37,858

$
—

$
215,475

Accounts receivable, less allowance for doubtful accounts
11

103,668

6,264

—

109,943

Inventory
—

138,478

1,043

(18,438
)
121,083

Intercompany interest receivable
—

—

3,153

(3,153
)
—

Prepaid and other current assets
—

64,448

14,232

—

78,680

Total current assets
76,820

407,402

62,550

(21,591
)
525,181

TIMBER AND TIMBERLANDS,
NET OF DEPLETION AND AMORTIZATION
—

115,030

1,373,065

1,794

1,489,889

NET PROPERTY, PLANT AND EQUIPMENT
—

625,544

4,267

—

629,811

INVESTMENT IN JOINT VENTURE
—

—

70,189

—

70,189

INVESTMENT IN SUBSIDIARIES
1,449,432

834,374

—

(2,283,806
)
—

INTERCOMPANY NOTES RECEIVABLE
220,188

—

—

(220,188
)
—

OTHER ASSETS
3,500

696,817

42,603

(544,122
)
198,798

TOTAL ASSETS
$
1,749,940

$
2,679,167

$
1,552,674

$
(3,067,913
)
$
2,913,868

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
83,347

$
8,315

$
—

$
91,662

Current maturities of long-term debt
—

41,268

—

—

41,268

Accrued taxes
—

58,631

6,091

—

64,722

Accrued payroll and benefits
—

22,603

2,463

—

25,066

Accrued interest
6,974

9,894

533

—

17,401

Accrued customer incentives
—

9,620

—

—

9,620

Other current liabilities
—

10,114

18,284

—

28,398

Current liabilities for dispositions and discontinued operations
—

8,929

—

—

8,929

Total current liabilities
6,974

244,406

35,686

—

287,066

LONG-TERM DEBT
325,000

565,878

76,907

—

967,785

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

75,524

—

—

75,524

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

140,153

—

—

140,153

OTHER NON-CURRENT LIABILITIES
—

24,009

1,365

—

25,374

INTERCOMPANY PAYABLE
—

179,765

235,770

(415,535
)
—

TOTAL LIABILITIES
331,974

1,229,735

349,728

(415,535
)
1,495,902

TOTAL SHAREHOLDERS’ EQUITY
1,417,966

1,449,432

1,202,946

(2,652,378
)
1,417,966

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,749,940

$
2,679,167

$
1,552,674

$
(3,067,913
)
$
2,913,868


26

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING BALANCE SHEETS
As of December 31, 2011
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
—

$
58,132

$
20,471

$
—

$
78,603

Accounts receivable, less allowance for doubtful accounts
—

90,658

4,350

—

95,008

Inventory
—

132,323

977

(11,302
)
121,998

Intercompany interest receivable
—

—

3,848

(3,848
)
—

Prepaid and other current assets
—

39,366

9,527

—

48,893

Total current assets
—

320,479

39,173

(15,150
)
344,502

TIMBER AND TIMBERLANDS,
NET OF DEPLETION AND AMORTIZATION
—

117,243

1,384,608

1,860

1,503,711

NET PROPERTY, PLANT AND EQUIPMENT
—

458,497

3,055

—

461,552

INVESTMENT IN JOINT VENTURE
—

—

69,219

—

69,219

INVESTMENT IN SUBSIDIARIES
1,238,661

801,838

—

(2,040,499
)
—

INTERCOMPANY NOTES RECEIVABLE
204,420

—

—

(204,420
)
—

OTHER ASSETS
—

710,663

31,622

(551,921
)
190,364

TOTAL ASSETS
$
1,443,081

$
2,408,720

$
1,527,677

$
(2,810,130
)
$
2,569,348

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
65,732

$
7,141

$
—

$
72,873

Current maturities of long-term debt
—

28,110

—

—

28,110

Accrued taxes
—

3,838

1,385

—

5,223

Accrued payroll and benefits
—

23,070

3,776

—

26,846

Accrued interest
8

6,427

609

—

7,044

Accrued customer incentives
—

10,369

—

—

10,369

Other current liabilities
—

10,319

7,536

—

17,855

Current liabilities for dispositions and discontinued operations
—

9,931

—

—

9,931

Total current liabilities
8

157,796

20,447

—

178,251

LONG-TERM DEBT
120,000

610,647

88,582

—

819,229

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

80,893

—

—

80,893

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

140,623

—

—

140,623

OTHER NON-CURRENT LIABILITIES
—

25,894

1,385

—

27,279

INTERCOMPANY PAYABLE
—

154,206

214,997

(369,203
)
—

TOTAL LIABILITIES
120,008

1,170,059

325,411

(369,203
)
1,246,275

TOTAL SHAREHOLDERS’ EQUITY
1,323,073

1,238,661

1,202,266

(2,440,927
)
1,323,073

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,443,081

$
2,408,720

$
1,527,677

$
(2,810,130
)
$
2,569,348


27

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
23,916

$
285,901

$
121,354

$
(77,529
)
$
353,642

INVESTING ACTIVITIES
Capital expenditures
—

(84,627
)
(27,388
)
—

(112,015
)
Purchase of timberlands
—

(101
)
(11,531
)
—

(11,632
)
Jesup mill cellulose specialties expansion
—

(104,782
)
—

—

(104,782
)
Change in restricted cash
—

—

(12,796
)
—

(12,796
)
Other
—

1,910

2,371

—

4,281

CASH USED FOR INVESTING ACTIVITIES
—

(187,600
)
(49,344
)
—

(236,944
)
FINANCING ACTIVITIES
Issuance of debt
325,000

15,000

15,000

—

355,000

Repayment of debt
(120,000
)
(53,153
)
(25,500
)
—

(198,653
)
Dividends paid
(152,358
)
—

—

—

(152,358
)
Proceeds from the issuance of common shares
20,732

—

—

—

20,732

Excess tax benefits on stock-based compensation
—

7,057

—

—

7,057

Debt issuance costs
(3,698
)
—

—

—

(3,698
)
Repurchase of common shares
(7,783
)
—

—

—

(7,783
)
Issuance of intercompany notes
(9,000
)
—

9,000

—

—

Intercompany distributions
—

(24,529
)
(53,000
)
77,529

—

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
52,893

(55,625
)
(54,500
)
77,529

20,297

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

(123
)
—

(123
)
CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
76,809

42,676

17,387

—

136,872

Balance, beginning of year
—

58,132

20,471

—

78,603

Balance, end of period
$
76,809

$
100,808

$
37,858

$
—

$
215,475


28

RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2011
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
136,224

$
293,595

$
62,828

$
(166,377
)
$
326,270

INVESTING ACTIVITIES
Capital expenditures
—

(60,887
)
(26,269
)
—

(87,156
)
Purchase of timberlands
—

(83,574
)
(10,588
)
—

(94,162
)
Jesup mill cellulose specialties expansion
—

(8,059
)
—

—

(8,059
)
Change in restricted cash
—

—

8,323

—

8,323

Other
—

584

(71
)
—

513

CASH USED FOR INVESTING ACTIVITIES
—

(151,936
)
(28,605
)
—

(180,541
)
FINANCING ACTIVITIES
Issuance of debt
—

75,000

105,000

—

180,000

Repayment of debt
—

(75,000
)
(105,000
)
—

(180,000
)
Dividends paid
(136,563
)
—

—

—

(136,563
)
Proceeds from the issuance of common shares
8,248

—

—

—

8,248

Excess tax benefits on stock-based compensation
—

4,951

—

—

4,951

Debt issuance costs
—

(1,351
)
(676
)
—

(2,027
)
Repurchase of common shares
(7,909
)
—

—

—

(7,909
)
Intercompany distributions
—

(135,309
)
(31,068
)
166,377

—

CASH USED FOR FINANCING ACTIVITIES
(136,224
)
(131,709
)
(31,744
)
166,377

(133,300
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

393

—

393

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
—

9,950

2,872

—

12,822

Balance, beginning of year
—

303,746

45,717

—

349,463

Balance, end of period
$
—

$
313,696

$
48,589

$
—

$
362,285










29




Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
When we refer to "we," "us," "our," "the Company," or "Rayonier," we mean Rayonier Inc. and its consolidated subsidiaries. References herein to "Notes to Financial Statements" refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.
The Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the 2011 Annual Report on Form 10-K.
Forward-Looking Statements
Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier's future financial and operational performance, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as "may," "will," "should," "expect," "estimate," "believe," "anticipate" and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements. The risk factors contained in Item 1A — Risk Factors in our 2011 Annual Report on Form 10-K, among others, could cause actual results to differ materially from those expressed in forward-looking statements that are made in this document.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward- looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report on Form 10-K.
Segments
We are a leading international forest products company primarily engaged in timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Forest Resources, Real Estate, Performance Fibers, and Wood Products. Forest Resources sales include all activities which relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by our real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in "Other Operations." Sales between operating segments are made based on estimated fair market value, and intercompany sales, purchases and profits or losses are eliminated in consolidation.
We evaluate financial performance based on the operating income of the segments. Operating income, as presented in the Condensed Consolidated Statements of Income and Comprehensive Income, is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations.


30


Results of Operations

Three Months Ended
September 30,
Nine Months Ended
September 30,
Financial Information (in millions)
2012
2011
2012
2011
Sales
Forest Resources
Atlantic
$
16

$
20

$
46

$
50

Gulf States
11

7

31

23

Northern
30

27

80

81

New Zealand
3

3

8

8

Total Forest Resources
60

57

165

162

Real Estate
Development
—

—

—

1

Rural
7

6

30

28

Non-Strategic Timberlands
6

26

7

29

Total Real Estate
13

32

37

58

Performance Fibers
Cellulose specialties
247

207

680

594

Absorbent materials
41

48

114

145

Total Performance Fibers
288

255

794

739

Wood Products
23

16

66

50

Other Operations
26

26

77

95

Intersegment Eliminations
(1
)
(1
)
(2
)
(4
)
Total Sales
$
409

$
385

$
1,137

$
1,100

Operating Income
Forest Resources
$
11

$
11

$
27

$
34

Real Estate
8

28

21

40

Performance Fibers
101

75

266

222

Wood Products
2

(1
)
7

(1
)
Other Operations
—

1

—

1

Corporate and other
(9
)
(6
)
(25
)
(21
)
Operating Income
113

108

296

275

Interest Expense, Interest Income and Other
(7
)
(12
)
(36
)
(37
)
Income Tax (Expense) Benefit (a)
(25
)
9

(57
)
(18
)
Net Income
$
81

$
105

$
203

$
220

Diluted Earnings Per Share
$
0.62

$
0.84

$
1.58

$
1.75

(a) The three and nine months ended September 30, 2011 include a tax benefit of $16 million from the reversal of a tax reserve related to the taxability of the alternative fuel mixture credit ("AFMC"). See Note 3 — Income Taxes for additional information.


31


FOREST RESOURCES
Sales (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/
Mix/Other
Atlantic
$
20

$
2

$
(6
)
$
16

Gulf States
7

—

4

11

Northern
27

(6
)
9

30

New Zealand
3

—

—

3

Total Sales
$
57

$
(4
)
$
7

$
60

Sales (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/
Mix/Other
Atlantic
$
50

$
3

$
(7
)
$
46

Gulf States
23

(1
)
9

31

Northern
81

(9
)
8

80

New Zealand
8

—

—

8

Total Sales
$
162

$
(7
)
$
10

$
165


Operating Income (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/
Mix
Cost/Other
Atlantic
$
2

$
2

$
(1
)
$
—

$
3

Gulf States
—

—

1

—

1

Northern
8

(6
)
4

1

7

New Zealand/Other
1

—

—

(1
)
—

Total Operating Income
$
11

$
(4
)
$
4

$
—

$
11


Operating Income (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/
Mix
Cost/Other
Atlantic
$
4

$
3

$
(1
)
$
2

$
8

Gulf States
—

(1
)
2

2

3

Northern
26

(9
)
1

(3
)
15

New Zealand/Other
4

—

—

(3
)
1

Total Operating Income
$
34

$
(7
)
$
2

$
(2
)
$
27

In the Atlantic region, sales for the 2012 periods were below 2011, primarily due to lower volumes, as 2011 included fire salvage timber. The 2012 quarter and year-to-date volumes returned to normalized levels declining 20 percent and six percent from the 2011 periods. Pine stumpage prices for the three and nine months ended September 2012 rose 19 percent and 14 percent over the prior year periods, respectively, as 2011 prices were also impacted by the fire salvage timber.
The Atlantic region's operating results improved as the higher sales prices more than offset the decline in volumes. The 2011 year-to-date results also reflected approximately $2 million of forest fire losses.
In the Gulf States region, sales increased for the three and nine months ended September 30, 2012 compared to the prior year periods as volumes rose 69 percent and 43 percent, respectively, mainly due to the integration of 2011 timberland acquisitions. The year-to-date increase was partially offset by a five percent decline in average prices due to a geographic mix shift. Operating income improved in 2012 primarily due to higher volumes. The 2012 year-to-date results also benefited from higher non-timber income.
In the Northern region, sales increased in third quarter 2012 over the prior year period reflecting a 29 percent increase in volumes due to timing as 2011 harvests were weighted towards the first half of the year. Third quarter and year-to-date sales and operating income were negatively impacted by weaker Asian demand as prices declined 16 percent and seven percent, respectively, compared to the prior year periods. Year-to-date 2012 results also reflect higher logging and transportation costs.

32


The New Zealand sales represent timberland management fees for services provided to our New Zealand joint venture ("JV") in which we own a 26 percent interest. The operating income primarily represents equity earnings related to the JV's timber activities, which declined in 2012 primarily due to lower carbon credit sales.
REAL ESTATE
Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: development HBU, rural HBU and non-strategic timberlands. Our strategy is to extract maximum value from our HBU properties. We pursue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses.
Sales (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/Mix
Development
$
—

$
—

$
—

$
—

Rural
6

1

—

7

Non-Strategic Timberlands
26

(16
)
(4
)
6

Total Sales
$
32

$
(15
)
$
(4
)
$
13


Sales (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/Mix
Development
$
1

$
—

$
(1
)
$
—

Rural
28

2

—

30

Non-Strategic Timberlands
29

(17
)
(5
)
7

Total Sales
$
58

$
(15
)
$
(6
)
$
37


Operating Income (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Cost/Volume/Mix/Other
Total Operating Income
$
28

$
(15
)
$
(5
)
$
8


Operating Income (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Cost/Volume/Mix/Other
Total Operating Income
$
40

$
(15
)
$
(4
)
$
21

As expected, 2012 operating results declined primarily due to a third quarter 2011 non-strategic sale of 6,300 acres at $3,995 per acre. This decline was slightly offset by an increase in rural prices due to geographic sales mix. Third quarter and year-to-date 2011 results also benefited from a $6 million property tax settlement covering 2005 through 2010.
PERFORMANCE FIBERS
Sales (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/
Mix
Cellulose specialties
$
207

$
33

$
7

$
247

Absorbent materials
48

(6
)
(1
)
41

Total Sales
$
255

$
27

$
6

$
288



33


Sales (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/
Mix
Cellulose specialties
$
594

$
83

$
3

$
680

Absorbent materials
145

(21
)
(10
)
114

Total Sales
$
739

$
62

$
(7
)
$
794

Cellulose specialties sales improved in 2012 versus the prior year periods as prices increased 15 percent and 14 percent for the quarter and year-to-date, respectively, reflecting strong demand. Cellulose specialties volumes increased by three percent and one percent compared to the respective 2011 periods mainly due to the timing of customer orders and a shift in production from absorbent materials.
Absorbent materials sales decreased from the prior year periods as prices declined 14 percent and 16 percent for third quarter and year-to-date 2012, respectively, due to weaker markets. Volumes declined seven percent for the nine months ended 2012 due to a production shift to cellulose specialties and minor production issues.
Operating Income (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/
Mix
Cost/Other
Total Operating Income
$
75

$
27

$
2

$
(3
)
$
101


Operating Income (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/
Mix
Cost/Other
Total Operating Income
$
222

$
62

$
(1
)
$
(17
)
$
266

Operating income improved for the three and nine months ended September 30, 2012 over the prior year periods as higher cellulose specialties prices more than offset weaker absorbent materials prices and increases in production costs, primarily wood and benefit costs.
As previously announced, we have commenced a cellulose specialties expansion ("CSE") project to convert a fiber line at our Jesup, Georgia mill from absorbent materials to cellulose specialties. The CSE is expected to be completed by mid-2013. Upon completion of the CSE and customer product qualifications, we will be exiting the more commodity-like absorbent materials business and transitioning to producing only cellulose specialties. Over the next twelve months, we do not expect the CSE to have a material impact on our revenues or expenses, as the project will be transitioning from the construction phase to the initial start-up and customer qualification phases.
Upon completion of the CSE, we will undergo a phase-in period to complete customer qualifications. After the phase-in period, we anticipate total sales and operating income to increase as we expect higher prices received for our cellulose specialties to more than offset expected cost increases of 11 percent to 13 percent and the net 70,000 metric ton reduction in our Performance Fibers production capacity. For the quarter ended September 30, 2012, our cellulose specialties average sales price of $1,885 per metric ton was $1,161 above our absorbent materials average sales price per metric ton. We expect our costs to increase after the CSE phase-in due to higher conversion costs and depreciation.
WOOD PRODUCTS
Sales (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume
Total Sales
$
16

$
4

$
3

$
23


Sales (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume
Total Sales
$
50

$
8

$
8

$
66



34


Operating (Loss) Income (in millions)
2011
Changes Attributable to:
2012
Three Months Ended September 30,
Price
Volume/Costs
Total Operating (Loss) Income
$
(1
)
$
4

$
(1
)
$
2


Operating (Loss) Income (in millions)
2011
Changes Attributable to:
2012
Nine Months Ended September 30,
Price
Volume/Costs
Total Operating (Loss) Income
$
(1
)
$
8

$
—

$
7

Wood Products results improved during the third quarter and nine months ended September 30, 2012 due to increased demand which caused prices to increase 21 percent and 14 percent and volumes to increase 14 percent and 15 percent from the respective prior year periods. The 2012 results also include a $1 million loss related to a fire at the Swainsboro mill.
OTHER OPERATIONS
Sales declined for the nine months ended September 30, 2012 from the prior year period due to lower export demand from our New Zealand log trading business. Third quarter and year-to-date operating results in 2012 and 2011 were close to break-even, with changes in operating income primarily due to foreign exchange gains and losses.
Corporate and Other Expense/Eliminations
Corporate and other expenses for third quarter 2012 increased $3 million from the prior year period primarily due to a $2 million favorable insurance settlement received in 2011. Year-to-date corporate and other expenses were $4 million above the prior year period due to higher stock-based compensation and pension costs.
Interest Expense, Interest Income and Other
Interest and other expenses for the third quarter were $5 million lower than the prior year period mainly due to the reversal of a tax related interest accrual. Year-to-date interest and other expenses were $1 million below 2011 as lower costs of borrowing more than offset higher average debt balances.
Income Tax Expense
The effective tax rates for the quarter and year-to-date were 23.4 percent and 21.9 percent compared to a 9.0 percent benefit and a 7.5 percent expense in 2011, respectively. The change in rates was primarily due to tax benefits received in 2011, including the reversal of the reserve related to the taxability of the AFMC and a $9.3 million benefit associated with the structuring of a transfer of higher and better use properties to a taxable REIT subsidiary from the REIT. Also, proportionately higher expected earnings from our taxable REIT subsidiaries increased the 2012 effective rates. See Note 3 — Income Taxes for additional information.
Outlook
In Forest Resources, we will continue to capitalize on local market opportunities in the Southeast. In Performance Fibers, we anticipate another record year driven by strong cellulose specialties markets and we remain on track to complete our CSE project by mid-2013. Overall, we expect operating income to increase 10 percent to 12 percent over 2011. However, due to non-routine tax benefits received in 2011, we still expect full year earnings to be comparable to 2011, excluding special items. We anticipate full year CAD to range from $295 million to $310 million.
Our full year 2012 financial guidance is subject to a number of variables and uncertainties, including those discussed under Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements of this Form 10-Q and Item 1A — Risk Factors in our 2011 Annual Report on Form 10-K.
Employee Relations
On June 30, 2012, collective bargaining agreements covering approximately 700 hourly employees at our Jesup mill expired. On October 12, 2012, an initial vote on the proposed contract was taken and the proposal was rejected by the unions. All parties have agreed to extend the contracts while negotiations continue. While there can be no assurance, we expect to reach mutually satisfactory agreements with our unions; however, a work stoppage could have a material adverse effect on our business, results of operations and financial condition. See also Item 1 — Business in our 2011 Annual Report on Form 10-K.


35


Liquidity and Capital Resources
Our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality in working capital needs and long-term debt has been used to fund major acquisitions and strategic projects.
Summary of Liquidity and Financing Commitments (in millions of dollars)
September 30,
December 31,
2012
2011
Cash and cash equivalents (a)
$
215

$
79

Total debt
1,009

847

Shareholders’ equity
1,418

1,323

Total capitalization (total debt plus equity)
2,427

2,170

Debt to capital ratio
42
%
39
%
(a) Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended September 30 :
2012
2011
Cash provided by (used for):
Operating activities
$
354

$
326

Investing activities
(237
)
(181
)
Financing activities
20

(133
)
Cash Provided by Operating Activities
Cash provided by operating activities increased primarily due to higher operating results in 2012 and lower working capital requirements. Partially offsetting this increase were higher cash tax payments due to higher expected income from our taxable REIT subsidiaries.
Cash Used for Investing Activities
Cash used for investing activities rose mainly due to strategic investments in the CSE and higher capital expenditures. The change in restricted cash from the timing of like-kind exchange transactions also contributed to the increase.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities increased mainly due to net borrowings of $156 million in 2012 as well as higher proceeds from option exercises. This was partially offset by higher dividend payments due to higher dividend rates in 2012.
Expected 2012 Expenditures
Capital expenditures in 2012 are forecasted to be between $150 million and $160 million, excluding strategic acquisitions and the CSE. We expect CSE expenditures in 2012 to approximate $200 million. Our 2012 dividend payments are expected to increase to $207 million from $185 million assuming no change in the quarterly dividend rate of $0.44 per share. In October 2012, we repaid $300 million in Senior Exchangeable Notes, financed through borrowing on our revolving credit facility. We expect to refinance this $300 million borrowing on a long-term basis in fourth quarter 2012.
We have no mandatory pension contributions in 2012 and do not expect to make any discretionary contributions. Cash payments for income taxes in 2012 are anticipated to be between $70 million and $80 million. Expenditures related to dispositions and discontinued operations are forecasted to be approximately $9 million. See Note 10 — Liabilities for Dispositions and Discontinued Operations for further information .


36


Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization ("EBITDA"), and Adjusted Cash Available for Distribution ("Adjusted CAD"). These measures are not defined by Generally Accepted Accounting Principles ("GAAP") and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA as a performance measure and Adjusted CAD as a liquidity measure. EBITDA is defined by the Securities and Exchange Commission. Adjusted CAD as defined, however, may not be comparable to similarly titled measures reported by other companies.
We reconcile EBITDA to Net Income for the consolidated Company and Operating Income for the Segments, as those are the nearest GAAP measures for each. Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions of dollars):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
Net Income to EBITDA Reconciliation
Net Income
$
81

$
105

$
203

$
220

Income tax expense (benefit)
25

(9
)
57

18

Interest, net
7

12

36

37

Depreciation, depletion and amortization
36

39

102

102

EBITDA
$
149

$
147

$
398

$
377

EBITDA by segment is a critical valuation measure used by our Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how the Company is performing relative to the assets under management. EBITDA by segment for the respective periods was as follows (millions of dollars):
Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
EBITDA by Segment
Forest Resources
$
30

$
28

$
80

$
82

Real Estate
9

34

26

51

Performance Fibers
116

91

308

262

Wood Products
3

(1
)
9

1

Other Operations
—

1

—

1

Corporate and other
(9
)
(6
)
(25
)
(20
)
EBITDA
$
149

$
147

$
398

$
377

For the three and nine months ended September 30, 2012 , EBITDA was higher than the prior year periods primarily due to higher operating results.

37


The following tables reconcile Operating Income by segment to EBITDA by segment (millions of dollars):
Forest Resources
Real Estate
Performance Fibers
Wood Products
Other Operations
Corporate and Other
Total
Three Months Ended September 30, 2012
Operating Income
$
11

$
8

$
101

$
2

$
—

$
(9
)
$
113

Add: Depreciation, depletion and amortization
19

1

15

1

—

—

36

EBITDA
$
30

$
9

$
116

$
3

$
—

$
(9
)
$
149

Three Months Ended September 30, 2011
Operating Income (Loss)
$
11

$
28

$
75

$
(1
)
$
1

$
(6
)
$
108

Add: Depreciation, depletion and amortization
17

6

16

—

—

—

39

EBITDA
$
28

$
34

$
91

$
(1
)
$
1

$
(6
)
$
147

Nine Months Ended September 30, 2012
Operating Income
$
27

$
21

$
266

$
7

$
—

$
(25
)
$
296

Add: Depreciation, depletion and amortization
53

5

42

2

—

—

102

EBITDA
$
80

$
26

$
308

$
9

$
—

$
(25
)
$
398

Nine Months Ended September 30, 2011
Operating Income (Loss)
$
34

$
40

$
222

$
(1
)
$
1

$
(21
)
$
275

Add: Depreciation, depletion and amortization
48

11

40

2

—

1

102

EBITDA
$
82

$
51

$
262

$
1

$
1

$
(20
)
$
377

Adjusted CAD is a non-GAAP measure of cash generated during a period which is available for dividend distribution, repurchase of the Company's common shares, debt reduction and strategic acquisitions. We define CAD as Cash Provided by Operating Activities adjusted for capital spending, the change in committed cash, and other items which include cash provided by discontinued operations, proceeds from matured energy forward contracts, excess tax benefits on stock-based compensation and the change in capital expenditures purchased on account. Committed cash represents outstanding checks that have been drawn on our zero balance bank accounts but have not been paid. In compliance with SEC requirements for non-GAAP measures, we reduce CAD by mandatory debt repayments which results in the measure entitled "Adjusted CAD."
Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):
Nine Months Ended
September 30,
2012
2011
Cash provided by operating activities
$
354

$
326

Capital expenditures (a)
(112
)
(87
)
Change in committed cash
6

—

Excess tax benefits on stock-based compensation
7

5

Other
6

(2
)
CAD
261

242

Mandatory debt repayments
(23
)
—

Adjusted CAD
$
238

$
242

Cash used for investing activities
$
(237
)
$
(181
)
Cash provided by (used for) financing activities
$
20

$
(133
)
(a) Capital expenditures exclude strategic capital. For the nine months ended September 30, 2012 , strategic capital totaled $131 million for the CSE and $12 million for timberland acquisitions. For the nine months ended September 30, 2011 , strategic capital totaled $94 million for timberland acquisitions and $15 million for the CSE.
Adjusted CAD declined slightly as higher operating earnings and lower working capital requirements were more than offset by higher capital expenditures, mandatory debt repayments and increased tax payments. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.

38


Liquidity Facilities
In March 2012, we issued $325 million of 3.75% Senior Notes due 2022. Approximately $150 million of the proceeds from these notes were used to repay borrowings outstanding under our revolving credit facility. The Company had $431 million of available borrowings under this facility at September 30, 2012 . During October 2012, the Company amended the revolving credit facility to take advantage of better pricing and change the debt ceiling calculation, in addition to other revisions discussed at Note 13 — Debt .
As of September 30, 2012 , our $172.5 million 4.50% Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending December 31, 2012 . Per the indenture, in order for the notes to become exchangeable, the Company's stock price must exceed 130 percent of the exchange price for 20 trading days in a period of 30 consecutive trading days as of the last day of the quarter. If the note holders exercise their option prior to December 31, 2012, the Company intends to repay the principal of the notes with cash on hand or by accessing the revolving credit facility and any excess exchange value will be settled at the option of the Company in either cash or stock of Rayonier.
The 3.75% Senior Exchangeable Notes due 2012 (the "Notes") matured in October 2012 and the outstanding principal balance of $300 million was paid in cash, financed through borrowings on the Company's revolving credit facility. The available borrowing capacity under the credit facility immediately after repayment of the Notes was $131 million. The exchangeable note hedges also matured and the associated shares were used to pay the excess exchange value of 2,221,056 shares of Rayonier stock. As a result, there was no impact on the number of shares outstanding. Warrants sold in conjunction with the issuance of the Notes and hedges remain outstanding and have maturity dates in first quarter 2013. The Company expects to settle the warrants in shares.
In connection with our installment note and credit facility, covenants must be met, including ratios based on the covenant definition of EBITDA and ratios of cash flows to fixed charges. At September 30, 2012 , we were in compliance with all of these covenants. See Note 13 — Debt for information on favorable covenant revisions under the amended revolving credit facility.
In addition to these financial covenants, the installment note, mortgage note and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between Rayonier Forest Resources, L.P. ("RFR") and Rayonier among others. An asset sales covenant in the RFR $112.5 million installment note agreement requires us, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments and activities or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. During April 2012, the excess proceeds exceeded the $50 million limit and as a result, repayment of $59.9 million was offered to the note holders through May 15, 2012, at which time they declined and the excess proceeds were reset to zero. The amount of excess proceeds was $0 and $37.5 million at September 30, 2012 and December 31, 2011, respectively.

Contractual Financial Obligations and Off-Balance Sheet Arrangements
The only significant changes to the Contractual Financial Obligations table as presented in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2011 Annual Report on Form 10-K, were the issuance of $325 million of 3.75% Senior Notes due 2022 and a net increase of $150 million on our revolving credit facility. As a result of these changes, interest payments on long-term debt are expected to increase by approximately $120 million through the year 2022. See Note 13 — Debt for additional information. See Note 9 — Guarantees for details on the letters of credit, surety bonds and guarantees as of September 30, 2012 .

39


Sales Volumes by Segment:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2012
2011
2012
2011
Forest Resources — in thousands of short green tons
Atlantic
847

1,056

2,407

2,563

Gulf States
509

301

1,354

946

Northern
529

409

1,396

1,321

Total
1,885

1,766

5,157

4,830

Real Estate — in acres
Development
23

31

57

138

Rural
2,813

2,946

12,301

12,411

Non-Strategic Timberlands
5,624

6,814

6,580

8,040

Total
8,460

9,791

18,938

20,589

Performance Fibers
Sales volume — in thousands of metric tons
Cellulose specialties
131

127

365

363

Absorbent materials
55

56

152

165

Total
186

183

517

528

Wood Products
Sales volume — in millions of board feet
76

66

221

192


Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market and Other Economic Risks
Our exposures to market risk have not changed materially since December 31, 2011 . For quantitative and qualitative disclosures about market risk, see Item 7A — Quantitative and Qualitative Disclosures about Market Risk in our 2011 Annual Report on Form 10-K.

Item 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), are designed with the objective of ensuring that information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance that their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the disclosure controls and procedures were effective as of September 30, 2012 .
In the quarter ended September 30, 2012 , based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.

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PART II.    OTHER INFORMATION

Item 6. Exhibits
3.1
Amended and Restated Articles of Incorporation
Incorporated by reference to Exhibit 3.1 to the Registrant's May 23, 2012 Form 8-K
3.2
Bylaws
Incorporated by reference to Exhibit 3.2 to the Registrant's October 21, 2009 Form 8-K
4.1
Second Supplemental Indenture relating to the 3.750% Senior Notes due 2022, dated March 5, 2012, among Rayonier Inc., as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee
Incorporated by reference to Exhibit 4.1 to the Registrant's October 17, 2012 Form 8-K
10.1
Amended and Restated Five Year Revolving Credit Agreement dated October 11, 2012 among Rayonier Inc., Rayonier TRS Holdings Inc. and Rayonier Operating Company LLC, as Borrowers, Credit Suisse AG, as Administrative Agent, Credit Suisse Securities (USA) LLC, as Sole Bookrunner, Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC, as Co-Syndication Agents, SunTrust Bank, US Bank, N.A., TD Bank, N.A. and Wells Fargo Bank, National Association, as Co-Documentation Agents and Credit Suisse Securities (USA) LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Lead Arrangers

Incorporated by reference to Exhibit 10.1 to the Registrant's October 17, 2012 Form 8-K
10.2
Amended and Restated Guarantee Agreement dated October 11, 2012 among Rayonier Inc., Rayonier TRS Holdings Inc. and Rayonier Operating Company LLC, as Guarantors, and Credit Suisse AG as Administrative Agent

Incorporated by reference to Exhibit 10.2 to the Registrant's October 17, 2012 Form 8-K
10.3
First Amendment and Restatement Agreement dated October 11, 2012 among Rayonier Inc., Rayonier TRS Holdings Inc., Rayonier Forest Resources, L.P. and Rayonier Operating Company LLC, as Borrowers, the Consenting Lenders, the Non-Consenting Lenders, the Existing Lenders and Regions Bank, Branch Banking and Trust Company, U.S. Bank, National Association and TD Bank, N.A., as Assignees, and Credit Suisse AG, as Administrative Agent

Incorporated by reference to Exhibit 10.3 to the Registrant's October 17, 2012 Form 8-K
31.1
Chief Executive Officer's Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith
31.2
Chief Financial Officer's Certification Pursuant to Rule 13a-14(a)/15d-14-(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed herewith
32
Certification of Periodic Financial Reports Under Section 906 of the Sarbanes-Oxley Act of 2002

Furnished herewith
101
The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2012, formatted in Extensible Business Reporting Language ("XBRL"), includes: (i) the Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011; (ii) the Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (iii) the Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011; and (iv) the Notes to Condensed Consolidated Financial Statements
Filed herewith


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RAYONIER INC.
(Registrant)
By:
/ S / HANS E. VANDEN NOORT
Hans E. Vanden Noort
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)
Date: October 26, 2012





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