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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
1177 SUMMER STREET, STAMFORD, CT 06905-5529
(Principal Executive Office)
Telephone Number: (203) 348-7000
Securities registered pursuant to Section 12(b) of
the Act, all of which are registered on the New York
Stock Exchange:
Common Shares
7.5% Notes, due October 15, 2002
Medium Term Notes, due 1996-1999
Securities registered pursuant to Section 12(g) of the Act: None
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 and (2) has been subject to such filing requirements for
the past 90 days.
YES /x/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the Common Shares of the registrant held by
non-affiliates of the Registrant on March 6, 1996 was approximately
$1,010,000,000.
As of March 6, 1996, there were outstanding 29,634,678 Common Shares of the
Registrant.
The registrant's definitive proxy statement filed or to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A involving the
election of directors at the annual meeting of the shareholders of the
registrant scheduled to be held on May 17, 1996, is incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business 1
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 7
* Executive Officers of Rayonier 7
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 8
6. Selected Financial Data 10
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 17
PART III
10. Directors and Executive Officers of the Registrant 17
11. Executive Compensation 17
12. Security Ownership of Certain Beneficial Owners and Management 17
13. Certain Relationships and Related Transactions 17
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 18
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K
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INDEX TO FINANCIAL STATEMENTS
Report of Management F-1
Report of Independent Public Accountants F-1
Statements of Consolidated Income for the
Three Years Ended December 31, 1995 F-2
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-3 to F-4
Statements of Consolidated Retained Earnings
and Statements of Consolidated Common Shares
for the Three Years Ended December 31, 1995 F-5
Statements of Consolidated Cash Flows for the
Three Years Ended December 31, 1995 F-6
Notes to Consolidated Financial Statements F-7 to F-19
INDEX TO FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not applicable,
the required matter is not present, the amounts are insignificant or immaterial,
or the information has been otherwise supplied in the financial statements or
the notes thereto.
Signatures A
Exhibit Index B to D
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PART I
ITEM 1. BUSINESS
GENERAL
Rayonier Inc. (Rayonier or the Company) is a leading international forest
products company primarily engaged in the trading, merchandising and manufacture
of logs, timber and wood products, and in the production and sale of
high-value-added specialty pulps. Rayonier owns, leases or controls
approximately 1.47 million acres of timberland in the United States and New
Zealand. In addition, the Company operates three pulp mills and three lumber
manufacturing facilities in the United States.
Rayonier traces its origin to the founding of Rainier Pulp and Paper Company in
Shelton, Washington, in 1926. With the consolidation of several pulp companies
in 1937, the Company became "Rayonier Incorporated", a corporation whose stock
was publicly traded on the New York Stock Exchange (NYSE) until Rayonier became
a wholly owned subsidiary of ITT Industries, Inc. (ITT), formerly known as ITT
Corporation, in 1968. On February 28, 1994, Rayonier again became an independent
company when ITT distributed all of the Common Shares of Rayonier to ITT
stockholders. Rayonier shares are publicly traded on the NYSE under the symbol
RYN.
Rayonier is a North Carolina corporation with its principal executive offices at
1177 Summer Street, Stamford, CT 06905-5529, and its telephone number is (203)
348-7000.
Rayonier operates in two major business segments, Timber and Wood Products and
Specialty Pulp Products. In 1995, Timber and Wood Products accounted for 47
percent of sales and Specialty Pulp Products accounted for 53 percent of sales.
With customers in 70 countries, more than half of Rayonier's 1995 sales of $1.26
billion were shipped to customers outside of the United States, with Asia
Pacific and Western European customers representing 38 percent and 12 percent of
total sales in 1995, respectively. For further data on sales, operating income
and identifiable assets by segment, see Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 17 - Segment
Information of the Notes to Consolidated Financial Statements.
TIMBER AND WOOD PRODUCTS
Rayonier's Timber and Wood Products business segment is composed of three
principal lines of business: (1) Log trading and merchandising, (2) Timberlands
management and stumpage and (3) Wood products. Sales for the last three years by
principal line of business were as follows (in millions of dollars):
Sales
-------------------------------
Timber and Wood Products 1995 1994 1993
------------------------ -------------------------------
Log trading and merchandising $393 $347 $334
Timberlands management and stumpage 168 173 120
Wood products 75 79 47
Intrasegment eliminations (18) (21) (16)
--- --- ---
Total $618 $578 $485
=== === ===
LOG TRADING AND MERCHANDISING
Rayonier is a leading supplier and exporter of softwood logs. The sale of logs
accounted for approximately 64 percent of the Timber and Wood Products segment's
sales in 1995. Rayonier buys and harvests timber stumpage (cutting rights to
standing timber) principally in Northwest North America from third parties as
well as from Company sources on an arms-length basis, competitively auctioned or
negotiated. The Company also purchases, merchandises and sells purchased logs
from New Zealand, both domestically in New Zealand as well as in export markets.
In 1995, 67 percent of New Zealand's sales came from Company-managed
timberlands. In North America, 9 percent of sales was directly sourced from
Rayonier's timberlands, however, additional logs were purchased from local
dealers who had, in turn, purchased their cutting rights from the Company's
timberland stumpage sales.
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The logs harvested and purchased are sold into export markets (primarily Japan,
Korea and China), as well as to pulp and lumber mills in domestic markets. The
Company also trades Canadian, Chilean and Russian timber. During 1995,
approximately 73 percent of the revenues Rayonier derived from the sale of logs
were from logs sold to export markets.
TIMBERLANDS MANAGEMENT AND STUMPAGE
Rayonier manages timberlands, scientifically growing and nurturing tree stands
until their economic peak for specific markets. The average rotation age for
timber destined for export markets from the Northwestern United States is 50
years (primarily hemlock and Douglas fir species). The average rotation age for
timber from the Southeastern United States is 25 years for timber sold to
sawmills and 20 years for pulpwood destined for pulp and paper mills. The
Company manages its timberlands on a sustainable yield basis in conformity with
forest industry practices.
The Company is organized to regularly sell timber stumpage in North America
through auction processes predominately to third parties. By requiring the
Company's other business sectors (e.g., Specialty Pulp Products, Wood Products
and Log Trading and Merchandising) to competitively bid on the stumpage, the
Company believes it can maximize the true economic return on its investment.
Another key to the success of the Company's management of timberlands has been
the extensive application of Rayonier's silvicultural expertise to species
selection for plantations, soil preparation, thinning of timber stands, pruning
of selected species and careful timing of harvest, all designed to maximize
growth and forest yields while responding to environmental needs.
As of December 31, 1995, Rayonier managed approximately 1.47 million acres of
timberlands, with approximately 860,000 acres or 58 percent located in the
Southeastern United States, approximately 379,000 acres or 26 percent located in
the Pacific Northwest (see Rayonier Timberlands, L.P.) and approximately 234,000
acres or 16 percent located in New Zealand.
The 860,000 acres of Southeastern timberlands are located primarily in Georgia
and Florida. Their proximity to a large number of pulp, paper and lumber mills
results in significant competition for the purchase of Rayonier's timber.
Approximately 746,000 acres are owned in fee and 114,000 acres are held under
long-term leases. The Southeastern timberlands include approximately 550,000
acres of pine plantations, 307,000 acres of hardwood lands and 3,000 non-forest
acres (representing main line and access roads and other acreage not suitable
for forest development). Approximately 46 percent of the timber harvest is
pulpwood, which is destined for pulp mills, with the remaining 54 percent
representing higher value sawlogs, which are sold to sawmills. Over the last
five years the Company, through advanced silvicultural practices, has been able
to increase the amount of timber volume per acre available for harvest from its
Southeastern timberlands by approximately 2 percent per year and expects this
trend to continue.
The 379,000 acres of the Company's Northwestern timberlands are located
primarily on the Olympic Peninsula in Washington state, are all owned in fee and
consist almost entirely of second-growth trees. These timberlands include
approximately 322,000 acres of softwood stands, approximately 73 percent of
which is hemlock and 27 percent Douglas fir, western red cedar and white fir.
The Northwestern timberlands also include approximately 19,000 acres of hardwood
timber stands, consisting principally of alder and maple. The remaining 38,000
acres are classified as non-forest lands.
Rayonier, through its wholly owned New Zealand subsidiary, holds forest assets
consisting primarily of Crown Forest licenses providing the right to utilize
approximately 234,000 acres of New Zealand plantation forests for a minimum
period of 35 years. Most of these timberlands consist of radiata pine trees,
with a planting-to-harvesting time of approximately 27 years, well-suited for
the highest quality lumber and panel products. These trees typically produce up
to twice as much fiber per acre, per year as the most productive commercial tree
species in the United States. Rayonier grows and harvests the New Zealand timber
for both domestic New Zealand uses and for export primarily to Pacific Rim
markets.
Rayonier seeks to maximize timberland value through reforestation and intensive
silvicultural research to improve tree growth and to systematically manage the
timberlands investment cycle by optimizing the economic returns on a species,
site and market driven basis. Management of the Company's forest resources
includes the annual planting of millions of genetically improved seedlings
developed at Rayonier or cooperative nurseries.
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WOOD PRODUCTS
Rayonier's two Georgia lumber mills located at Baxley and Swainsboro convert
southern yellow pine timber into dimension and specialty lumber products for
residential construction and industrial uses. The Baxley mill utilizes modern
and technologically advanced equipment, including computer and laser technology.
The other lumber operations (an integrated complex located at Swainsboro and
Lumber City, Georgia) were acquired in October 1993. They have a combined annual
capacity of approximately 225 million board feet of lumber and, in 1995 an
output of approximately 430,000 tons of wood chips for pulping. The mills sell
their lumber output primarily in Southeastern markets. Substantially all of the
wood chip production, however, is sold (at market price) to Rayonier's Jesup,
Georgia pulp facility and accounted for approximately 22 percent of Jesup's 1995
pine chip consumption.
Rayonier's third lumber manufacturing facility, which was acquired in 1995, is
located in Plummer, Idaho. The facility consists of a lumber mill and
remanufacturing plant, with annual capacity of 60 million board feet and 12
million board feet, respectively.
The sale of lumber accounted for approximately 12 percent of the Timber and Wood
Products segment's sales in 1995. In addition, the Company is constructing a
medium-density fiberboard facility in New Zealand with an annual capacity of
140,000 cubic meters. The Company expects the facility to begin operations in
1997. Sales of logs and lumber in the Timber and Wood Products segment are made
directly by Rayonier sales personnel to customers, although sales to certain
export locations are made through agents.
SPECIALTY PULP PRODUCTS
Rayonier is a leading specialty manufacturer of chemical cellulose, often called
dissolving pulp, from which customers produce a wide variety of products,
principally textile, industrial and filtration fibers, plastics and other
chemical intermediate industrial products. Rayonier believes that it is one of
the world's largest manufacturers of high-grade chemical cellulose. Rayonier
also manufactures fluff pulps that customers use to produce diapers and other
sanitary products, and specialty paper pulps used in the manufacture of products
such as filters and decorative laminates.
Sales for the last three years, by principal line of business are shown below
(in millions of dollars):
Sales
--------------------------
Specialty Pulp Products 1995 1994 1993
----------------------- ---- ---- ----
Chemical cellulose $379 $307 $279
Fluff and specialty paper pulps 283 193 183
--- --- ---
Total $662 $500 $462
=== === ===
Rayonier manufactures more than 25 different grades of pulp. The Company owns
and operates three wood pulp mills in Jesup, Georgia, Fernandina Beach, Florida,
and Port Angeles, Washington which have an aggregate annual capacity of
approximately 826,000 metric tons. Rayonier's wood pulp production facilities
are able to manufacture a broad mix of products to meet customers' needs. The
Jesup facility, a kraft mill that began operations in 1954 and was subsequently
significantly expanded and modernized, today accounts for approximately 530,000
metric tons of annual wood pulp production capacity, or 64 percent of Rayonier's
current total. The Fernandina Beach facility began operations in 1939 and
accounts for approximately 146,000 metric tons of annual wood pulp production
capacity, or 18 percent of Rayonier's current total. The Port Angeles facility
began operations in 1929 and accounts for approximately 150,000 metric tons of
annual wood pulp production capacity, or 18 percent of Rayonier's current total.
Rayonier concentrates on the production of specialty market pulps to customers'
specifications that are sold to industrial companies producing a wide variety of
products. Over half of Rayonier's pulp sales are to export customers, primarily
in Western Europe and Asia Pacific. Over 90 percent of specialty pulp sales are
made directly by Rayonier sales personnel. In certain of the Company's export
locations, sales are made with the aid of agents.
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CHEMICAL CELLULOSE
Rayonier is one of the world's leading producers of chemical cellulose, often
called dissolving pulp, which is a highly-purified form of pulp. Chemical
cellulose is used in a wide variety of products such as textile fibers, rigid
packaging, photographic film, impact-resistant plastics, high tenacity rayon
yarn for tires and industrial hoses, pharmaceuticals, cosmetics, detergents,
sausage casings, food products, thickeners for oil well drilling muds, cigarette
filters, lacquers, paints, printing inks and explosives. Chemical cellulose
accounted for approximately 57 percent of the Company's Specialty Pulp Products'
sales in 1995.
Within the chemical cellulose industry, Rayonier concentrates on the most highly
valued, technologically demanding end uses, such as cellulose acetate and
high-purity cellulose ethers. In each of these markets, Rayonier believes it is
the leading supplier.
FLUFF AND SPECIALTY PAPER PULPS
Rayonier believes it is one of the top five suppliers to fluff pulp users. Fluff
pulp is used as an absorbent medium in products such as disposable baby diapers,
personal sanitary napkins, incontinent pads, convalescent bed pads, industrial
towels and wipes and non-woven fabrics. Fluff pulp accounted for approximately
36 percent of the Company's pulp sales in 1995.
Rayonier is a major producer of specialty paper pulps and produces a small
volume of regular paper pulp. Customers use Rayonier's specialty paper pulps to
manufacture paper for decorative laminates for counter tops, shoe innersoles,
battery separators, circuit boards, air and oil filters and filter media for the
food industry. Specialty paper pulp sales were 4 percent of Rayonier's total
pulp sales in 1995. A small volume of regular paper pulp, approximately 3
percent of total Company pulp sales, is used in the manufacture of bond, book
and printing paper.
PULP PRICING
Pulp industry prices are cyclical. In 1994, Specialty Pulp Products began to
emerge from a four-year down-turn characterized by weak worldwide demand and
excess capacity for pulp products. Demand continued to strengthen in 1995 and
Rayonier realized significant price increases for all of its specialty pulp
products. The prices of Rayonier's pulp products generally begin to rise midway
through the business cycle and lag commodity pulp price increases by up to a
year. An industry-wide near-term inventory correction beginning in the fourth
quarter of 1995 resulted in a reduction in fluff pulp prices from earlier high
levels, as well as a reduction in Southeast U.S. stumpage prices. That trend is
expected to continue into 1996. However, price increases implemented in the
first quarter of 1996 for chemical cellulose products are expected to offset
some of those effects in the first half of the year.
Because Rayonier is a non-integrated market pulp producer, its high-value
product mix pricing trends tend to lag (on both the upturn and downturn) pulp
and paper industry trends which are dominated by paper, paperboard and newsprint
products. Over the past ten to twelve years, compared to commodity paper pulp
prices, the Company's price trends for fluff grades have lagged by one to two
quarters and for chemical cellulose by three to four quarters.
FOREIGN SALES AND OPERATIONS
Rayonier relies on foreign markets for its pulp and timber products with
approximately 56 percent of its sales going to foreign customers during the past
five years. In 1995, Asian markets accounted for 33 percent of U.S. sales and
Western Europe 13 percent. Exports, primarily to Asian markets, also accounted
for 60 percent of Rayonier's New Zealand sales. The Company is therefore
reasonably dependent upon strong economic growth in all international markets
including that of the United States. With alternate markets in Latin America and
the Middle East, however, the Company has been able to spread its geographical
risk when specific markets have entered economic recessions.
Overseas assets amounted to 15 percent of total assets as of the end of 1995,
and Rayonier's sales from non-U.S. sources in 1995 were 11 percent of total
sales.
See Note 17 - Segment Information of the Notes to Consolidated Financial
Statements.
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DISPOSITIONS
Dispositions includes units and site facilities no longer considered integral to
Rayonier's business strategy. This includes Rayonier's wholly owned subsidiary,
Southern Wood Piedmont Company (SWP), its interest in the Grays Harbor,
Washington, pulp and paper complex and other miscellaneous operations held for
disposition.
In 1992, Rayonier provided $180 million, pretax, for the loss on disposal of
assets along with the costs for severance, demolition, and other close-down
items associated with the disposition of the Grays Harbor complex. The Company
has substantially completed all programs associated with this charge except for
certain environmental remediation programs. In addition, in 1986, Rayonier
discontinued the SWP treated wood business. Although operations have ceased, SWP
is involved in several environmental remediation programs and is in negotiations
with various state and federal agencies regarding the scope and timing for
remaining programs. Future cost is dependent on the outcome of such negotiations
and may also be affected by new laws, regulations and administrative
interpretations, and changes in environmental remediation technology.
Accordingly, although considerable progress on cleanup has been made, there is
still uncertainty as to the timing and amount of future expenditures for
completing environmental programs at Grays Harbor, the SWP sites and certain
other non-operating locations.
Rayonier currently estimates that expenditures for environmental remediation
during 1996-1997 will total approximately $20 million, pretax. As of December
31, 1995, Rayonier had reserves of $40 million for environmental obligations.
The Company believes that any future changes in estimates, if necessary, will
not materially affect its financial condition or results of operations.
RAYONIER TIMBERLANDS, L.P.
In the United States, Rayonier manages timberlands and sells timber stumpage
directly through Rayonier Timberlands, L.P. (RTLP), a publicly traded master
limited partnership. Rayonier and Rayonier Forest Resources Company (RFR), a
wholly owned subsidiary, are the general partners of RTLP. Rayonier also owns
74.7 percent of the Class A Limited Partnership Units, with the remaining 25.3
percent being publicly held. Revenues, expenses and cash flow associated with
RTLP's normal timber harvesting are allocated 95 percent to all Class A Units
(24 percent to the publicly held Class A Units) through December 31, 2000 and 4
percent to all Class A Units (1 percent to the publicly held Class A Units)
thereafter. RTLP's sales of timber after that date as well as cash flow
associated with land management activities before and after that date are
principally allocable to the Class B Limited Partnership Units, all of which
have been retained by Rayonier. RTLP, through Rayonier Timberlands Operating
Company, L.P., owns, leases and manages timberlands in the Southeastern and
Northwestern United States previously owned or leased by Rayonier, sells timber
stumpage from such timberlands and from time to time purchases and sells
timberlands. RTLP's timberlands provide a source of wood used in Rayonier's
other businesses. Since RTLP is majority owned by the Company, RTLP is included
in the Company's consolidated financial statements as a consolidated entity. The
Company's investment in RTLP as of December 31, 1995 was $139 million, on the
basis of historical cost.
PATENTS
Rayonier has a large number of patents which relate primarily to its products
and processes. It also has pending a number of patent applications. Although,
overall, Rayonier's patents are of importance in the operation of its business,
Rayonier does not consider any of its patents or group of patents relating to a
particular product or process to be of material importance from the standpoint
of Rayonier's total business.
COMPETITION AND CUSTOMERS
Rayonier has for many years targeted the Pacific Rim as a market for its timber
and wood products. Rayonier has been involved in the marketing of pulp products
in Japan since the 1930's and in Korea and China for over 15 years.
The Company's domestic timberlands are located in two major timber growing
regions of the United States (the Southeast and the Northwest), where timber
markets are fragmented and very competitive. In the Northwest U.S., stumpage
sold by John Hancock Mutual Life Insurance Co. and from Washington state-owned
public forests are the most significant competition. In both the Northwest U.S.
and Southeast U.S., smaller forest products companies and private land owners
compete with the Company. Price is the principal method of competition in this
market.
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Export markets for Rayonier's logs are equally competitive, with logs available
to customers from several countries and from several suppliers within each
country. Within New Zealand, major competitors include Carter Holt Harvey
Limited, Fletcher Challenge Limited and New Zealand Forestry Corporation.
Weyerhaeuser Company, International Paper Company and Cavenham Forest
Industries, Inc. are the principal competitors to Rayonier in the log trading
business. Log customers may switch species of logs from those sold by Rayonier
to other lower-cost species sourced elsewhere. Price is the principal method of
competition with respect to the acquisition of logs or stumpage for resale, and
price and customer relationships are important methods of competition in the
sale of logs to final customers.
Rayonier's wood products, in particular lumber, compete with the products of
numerous companies, many of which are larger and have greater resources than
Rayonier. Such lumber also competes with alternative construction materials. In
most of Rayonier's markets, competition is primarily through price, quality,
customer relationships and technical service.
Rayonier is a major producer of specialty pulp products, including chemical
cellulose, fluff and specialty paper pulps (for example, pulps for filtration
papers) and is only a minor producer of regular paper making pulp. The Company's
products are marketed worldwide against strong competition from domestic and
foreign producers. Some of Rayonier's major competitors are Georgia-Pacific
Corporation, International Paper Company, Weyerhaeuser Company, Buckeye
Cellulose Corporation and Stora Kopparbergs Bergslags AB. Product performance,
pricing and, to a lesser extent, technical service are the principal methods of
competition.
Rayonier sells its pulp products primarily to a diversified group of major
domestic and foreign companies. In 1995, 37 percent of pulp product sales were
to the U.S., 28 percent to Asia Pacific, 22 percent to Western Europe, and 9
percent to Latin America.
ENVIRONMENTAL MATTERS
See Environmental Regulation in Item 7 - Management's' Discussion and Analysis
of Financial Condition and Results of Operations and Note 15 - Legal Proceedings
of the Notes to Consolidated Financial Statements.
RAW MATERIALS
Regional timber availability continues to be restricted by legislation,
litigation and pressure from various preservationist groups. While Rayonier's
timber products business has benefited from a significant increase in log and
timber stumpage prices, this increase has also adversely impacted fiber costs at
Rayonier's Port Angeles pulp manufacturing facility in the Northwest and more
recently, fiber costs to its mills in the Southeast.
Rayonier has pursued, and is continuing to pursue, reductions in costs of other
raw materials, supplies and contract services at the Company's pulp mills.
However, the recent strength in worldwide economies has caused the prices of
some of the Company's process chemicals to increase above normal inflation.
Management foresees no constraints in pricing or availability of its key raw
materials, other than the comments concerning wood fiber and process chemicals
above.
RESEARCH AND DEVELOPMENT
Rayonier believes it has one of the preeminent research facilities and staffs in
the forest products industry. Rayonier has been able to utilize this research
resource to enhance the marketing of its products to various customers. For its
pulp business, research and development efforts are directed primarily at the
development of new and improved pulp grades, improved manufacturing efficiency,
reduction of energy needs, product quality and development of improved
environmental controls. Research efforts are concentrated at the Rayonier
Research Center in Shelton, Washington. The Company will relocate the Rayonier
Research Center to Jesup, Georgia, in 1996.
Research activities related to Rayonier's forest resources operations include
genetic tree improvement programs as well as applied silviculture programs to
identify management practices that improve returns from the Company's timberland
assets.
Research and development expenditures were $8 million in 1995 and $7 million
each in 1994 and 1993.
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EMPLOYEE RELATIONS
Rayonier currently employs approximately 2,900 people. Of this number,
approximately 2,700 are employees in the United States, of which 52 percent are
covered by labor contracts. Most hourly employees are represented by one of ten
labor unions. Generally, labor relations have been maintained in a normal and
satisfactory manner.
Labor union contracts with Rayonier represent approximately 1,400 employees at
the three pulp mills and at the Rayonier Research Center. Bargaining activity in
1995 resulted in a seven-year labor agreement with the four unions that
represent the 788 hourly employees at the Jesup pulp mill. A four-year agreement
with the two unions that represent the hourly employees at the Port Angeles pulp
mill was completed in January 1996. Labor contracts for the Fernandina pulp mill
will expire in 1997.
Rayonier has in effect various plans which extend to its employees and retirees
certain group medical, dental and life insurance coverage, pension and other
benefits. The cost of such benefit plans is borne primarily by Rayonier, with
the exception of health care, for which employees are responsible for
approximately 20 percent of premium costs.
ITEM 2. PROPERTIES
RTLP owns, leases or controls approximately 1.2 million acres of timberlands in
the United States previously owned or leased by Rayonier. See Note 4 - Rayonier
Timberlands, L.P. of the Notes to Consolidated Financial Statements. Rayonier,
through its wholly owned subsidiary, RFR, as managing general partner of RTLP,
continues on behalf of RTLP to manage such properties and sell stumpage
therefrom to Rayonier as well as unaffiliated parties. Rayonier's New Zealand
subsidiary owns or manages the forest assets on approximately 234,000 acres of
plantation forests in New Zealand. Rayonier and its wholly owned subsidiaries
own or lease various other properties used in their operations, including three
pulp mills, three lumber manufacturing facilities, a research facility, various
other timberlands and Rayonier's executive offices. These facilities (except for
the executive offices in Stamford, Connecticut) are located in the Northwestern
and Southeastern portions of the United States and in New Zealand.
ITEM 3. LEGAL PROCEEDINGS
See Note 15 - Legal Proceedings of the Notes to Consolidated Financial
Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Rayonier during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF RAYONIER
RONALD M. GROSS, 62, Chairman of the Board, President and Chief Executive
Officer - After joining Rayonier in March 1978 as President and Chief Operating
Officer and a director, he was elected Chief Executive Officer in 1981 and
Chairman in 1984. He also serves as President and a director of RFR and is a
director of Lukens Inc. and The Pittston Company. Mr. Gross is a graduate of
Ohio State University and the Harvard Graduate School of Business
Administration.
WALLACE L. NUTTER, 52, Executive Vice President - He was elected Executive Vice
President of Rayonier in 1987 and has overall responsibility for the specialty
pulp, log trading and wood products businesses. He was named Senior Vice
President, Operations, in 1985 and Vice President and Director, Forest Products
Operations, in 1984. He joined Rayonier in 1967 in the Northwest Forest
Operations. Mr. Nutter is a member of the Board of Governors of the National
Council for Air and Stream Improvement. He graduated from the University of
Washington and the Harvard Graduate School of Business Administration Advanced
Management Program.
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WILLIAM S. BERRY, 54, Senior Vice President, Forest Resources and Corporate
Development - He was elected Senior Vice President, Forest Resources and
Corporate Development, of Rayonier in January 1994. He was Senior Vice
President, Land and Forest Resources, of Rayonier from January 1986 to January
1994. From October 1981 to January 1986 he was Vice President and Director of
Forest Products Management. Mr. Berry joined Rayonier in 1980 as Director of
Wood Products Management. He serves as Senior Vice President of RFR. He also
serves on the Executive Board of the Center for Streamside Studies. He holds a
B.S. in Forestry from the University of California at Berkeley and an M.S. in
Forestry from the University of Michigan.
GERALD J. POLLACK, 54, Senior Vice President and Chief Financial Officer - He
was elected Senior Vice President and Chief Financial Officer of Rayonier in May
1992. From July 1986 to May 1992, he was Vice President and Chief Financial
Officer. Mr. Pollack joined Rayonier in June 1982 as Vice President and
Controller. He serves as Chief Financial Officer of RFR. He is a member of the
New York Advisory Board of The Allendale Insurance Co., the financial management
committee of the American Forest & Paper Association and the Financial Executive
Institute. Mr. Pollack has a B.S. degree in Physics from Rensselaer Polytechnic
Institute and an MBA in Accounting and Finance from the Amos Tuck School at
Dartmouth.
KEVIN S. O'BRIEN, 64, Senior Vice President - He was elected Senior Vice
President, Pulp Marketing, for Rayonier in November 1989. In 1980 he had been
elected a Vice President and appointed Director of Strategic Planning and
Development, a position which he held until 1989. He joined Rayonier in 1957. He
holds an A.B. in Economics from Harvard University and an MBA from New York
University.
JOHN P. O'GRADY, 50, Senior Vice President, Administration - He was elected
Senior Vice President, Human Resources, of Rayonier in January 1994 and Senior
Vice President, Administration, effective January 1996. He was Vice President,
Administration, of Rayonier from July 1991 to January 1994. From December 1975
to July 1991, he held a number of human resources positions at ITT Corporation.
Prior to joining Rayonier, he was Vice President, Administration, at ITT Federal
Services Corporation from October 1983 through June 1991. Mr. O'Grady is a
Management Trustee for United Paperworkers' Health and Welfare Trust and serves
on the Trenton State College Advisory Council. He holds a B.S. degree in Labor
Economics from the University of Akron, an M.S. degree in Industrial Relations
from Rutgers University and a Ph.D. in Management from California Western
University.
KENNETH P. JANETTE, 50, Vice President and Corporate Controller - He joined
Rayonier in August 1994 and was elected Vice President and Corporate Controller
in October 1994. From 1990 to 1994, he was Vice President and Corporate
Controller of Sunkyong America, Inc., an international trading company. He was
with AMAX Inc. from 1977 to 1990 and previously with Arthur Andersen LLP. He is
a Certified Public Accountant and a member of the Financial Executives
Institute, the American Institute of Certified Public Accountants and the
Institute of Management Accountants. He holds a B.S. degree in Accounting and an
MBA in Finance from the University of Rochester.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On February 28, 1994, ITT, the Registrant's sole shareholder, distributed, as a
special dividend, all of the common shares of the Registrant. February 18, 1994
was the first trading day for Rayonier Common Shares on a when-issued basis.
Regular trading commenced on March 2, 1994.
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RAYONIER COMMON SHARES - MARKET PRICES AND DIVIDENDS (UNAUDITED)
Composite
High Low Volume Dividend
---- --- ---------- --------
1995
First Quarter $31.88 $28.25 6,480,000 $.25
Second Quarter 35.75 30.63 6,300,000 .25
Third Quarter 40.63 35.38 3,750,000 .25
Fourth Quarter 39.25 31.50 6,020,000 .25
1994
First Quarter $35.00 $27.50 14,410,000 $.18
Second Quarter 30.50 26.75 8,400,000 .18
Third Quarter 34.63 28.38 4,090,000 .18
Fourth Quarter 32.25 27.00 5,380,000 .18
The above table reflects the range of market prices of Rayonier Common Shares as
reported in the consolidated transaction reporting system of the New York Stock
Exchange, the only exchange on which this security is listed, under the trading
symbol RYN.
On February 16, 1996, Rayonier announced a 4 cent, or 16 percent, increase in
its quarterly dividend. The first quarter dividend of 29 cents per share is
payable on March 29, 1996 to shareholders of record on March 8, 1996.
There were approximately 32,524 holders of record of Rayonier Common Shares on
February 29, 1996.
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ITEM 6. SELECTED FINANCIAL DATA
The following summary of historical financial data for each of the five years
ended December 31, 1995 are derived from the consolidated financial statements
of the Company. The data should be read in conjunction with the consolidated
financial statements (dollar amounts in millions, except per share data).
Year Ended December 31
---------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
OPERATIONS:
Sales $1,260 $1,069 $ 936 $ 974 $ 979
Operating income before provision for
dispositions 234 169 130 102 97
Provision for dispositions - - (3) (189)(1) -
Operating income (loss) 234 169 127 (87) 97
Income (loss) from continuing operations 142 70 52 (81) 44
Cumulative effect of accounting changes - - - (22) -
Net income (loss) 142 70 52 (103) 44
PER COMMON SHARE:
Income (loss) from continuing operations $ 4.75 $ 2.36 $ 1.77 $ (2.77) $ 1.50
Cumulative effect of accounting changes - - - (0.74) -
Net income (loss) 4.75 2.36 1.77 (3.51) 1.50
Dividends 1.00 .72 4.12(2) .59 .66
Book Value 25.95 22.15 20.51 22.85 26.95
FINANCIAL CONDITION:
Total assets $1,648 $1,524 $1,488 $1,487 $1,382
Total debt 450 483 498 403 205
Book value 769 655 606 676 797
CASH FLOW:
Cash flow from operations $ 213 $ 190 $ 118 $ 133 $ 132
Capital expenditures 143 101 72 97 134
Depreciation, depletion and amortization 96 90 78 78 69
EBITDA(3) 303 229 187 156 147
EBIT(4) 207 139 109 78 78
Free cash flow(5) 107 90 36 24 11
Dividends 30 21 122(2) 18 20
PERFORMANCE RATIOS:
Operating income to sales(6) 19% 16% 14% 10 % 10%
Return on equity(7) 20% 11% 8% (11)% 6%
Return on assets(7) 9% 5% 4% (6)% 3%
Debt to total capital 37% 43% 45% 37 % 20%
OTHER:
Number of employees 2,900 2,700 2,600 2,800 3,000
Timberlands, thousands of acres 1,473 1,501 1,495 1,496 1,266
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Year Ended December 31
----------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
SELECTED OPERATING DATA (UNAUDITED)
Timber and Wood Products
Log sales
North America - million board feet 351 306 266 435 542
New Zealand - thousand cubic meters 1,682 1,623 1,375 682 259
Other - million board feet 17 9 11 - -
Timber harvested
Northwest U.S. - million board feet 175 194 143 195 189
Southeast U.S. - thousand short green tons 2,218 2,184 2,001 2,006 2,037
New Zealand - thousand cubic meters 1,133 1,155 918 636 -
Lumber sold - million board feet 213 197 125 118 103
Intercompany sales
Logs - million board feet 22 13 15 20 35
Northwest U.S. timber stumpage - million board feet 32 36 28 44 68
Southeast U.S. timber stumpage -
thousand short green tons 292 199 299 317 398
Specialty Pulp Products
Chemical cellulose sales - thousand metric tons 440 428 369 399 412
Fluff and specialty paper pulp sales -
thousand metric tons (8) 344 362 352 367 381
Production as a percent of capacity 99% 94% 85% 95% 97%
(1) Includes a $180 million ($115 million after-tax) charge related to the
disposition of the Grays Harbor Complex.
(2) Includes a $90 million special dividend paid to ITT.
(3) EBITDA is defined as earnings from continuing operations before
non-recurring items, provision for dispositions, interest expense, income
taxes and depreciation, depletion and amortization.
(4) EBIT is defined as earnings from continuing operations before
non-recurring items, provision for dispositions, interest expense and
income taxes.
(5) Free cash flow is defined as income from continuing operations plus
depreciation, depletion and amortization, deferred income taxes and
changes in working capital, less custodial capital spending and prior-year
dividend levels.
(6) Based on operating income before provision for dispositions.
(7) Based on income (loss) from continuing operations.
(8) Excludes wood pulp sales by the Grays Harbor pulp mill of 62 thousand and
77 thousand metric tons for the years ended December 31, 1992 and 1991,
respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SEGMENT INFORMATION
The amounts and relative contributions to sales and operating income
attributable to each of Rayonier's business segments for each of the three years
ended December 31, 1995 were as follows (in millions of dollars):
Year Ended December 31
------------------------------------
SALES 1995 1994 1993
- ----- ---- ---- ----
TIMBER AND WOOD PRODUCTS
Log trading and merchandising $ 393 $ 347 $334
Timberlands management and stumpage 168 173 120
Wood products 75 79 47
Intrasegment eliminations (18) (21) (16)
------ ------ ----
Total Timber and Wood Products 618 578 485
------ ------ ----
SPECIALTY PULP PRODUCTS
Chemical cellulose 379 307 279
Fluff and specialty paper pulps 283 193 183
------ ------ ----
Total Specialty Pulp Products 662 500 462
------ ------ ----
Intersegment eliminations (20) (9) (11)
----- ------ ----
Total sales $1,260 $1,069 $936
====== ====== ====
OPERATING INCOME
Timber and Wood Products $ 141 $ 163 $144
Specialty Pulp Products 105 13 (4)
Corporate and other (12) (8) (8)
Intersegment eliminations - 1 (2)
------ ------ ----
Total before dispositions 234 169 130
Dispositions - - (3)
------ ------ ----
Total operating income $ 234 $ 169 $127
====== ====== ====
CHANGE IN OWNERSHIP
On February 28, 1994, ITT Industries Inc. (ITT), formerly known as ITT
Corporation, distributed all outstanding Common Shares of Rayonier to ITT
stockholders, resulting in Rayonier becoming an independent, publicly held
company.
BUSINESS CONDITIONS
Rayonier's 1995 net income of $142 million, or $4.75 per Common Share, was more
than double its 1994 net income of $70 million, or $2.36 per Common Share.
Excluding a non-recurring gain on a New Zealand timberland sale, earnings were
$118 million, or $3.95 per Common Share. The favorable 1995 results were
attributable to a strong market for Specialty Pulp Products and favorable
Southeast U.S. stumpage prices.
Rayonier's operating results are primarily driven by international economic
factors. In 1995, almost 60 percent of Rayonier sales were made to customers
outside the United States. In 1994 and 1995, strengthening economies in North
America and Europe resulted in increased demand and significantly higher prices
for the Company's specialty pulp products. Stronger domestic pulp and paper
markets in turn resulted in higher prices for the Company's Southeast U.S.
stumpage. However, a stagnant Japanese economy and a stronger U.S. dollar led to
soft markets for Northwest U.S. stumpage and New Zealand logs.
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The Company's operating results are cyclical, particularly for Specialty Pulp
Products. In 1994, Specialty Pulp Products began to emerge from a four-year
down-turn characterized by weak worldwide demand and excess capacity for pulp
products. Demand continued to strengthen in 1995 and Rayonier realized
significant price increases for all of its specialty pulp products. The prices
of Rayonier's pulp products generally begin to rise midway through the business
cycle and lag commodity pulp price increases by up to a year. An industry-wide
near-term inventory correction beginning in the fourth quarter of 1995 resulted
in a reduction in fluff pulp prices from earlier high levels, as well as a
reduction in Southeast U.S. stumpage prices. That trend is expected to continue
into 1996. However, price increases implemented in the first quarter of 1996 for
chemical cellulose products are expected to offset some of those effects in the
first half of the year.
Rayonier plans to increase capital spending through expansion of its New Zealand
operations, acquisitions and growth in the Timber and Wood Products businesses,
and quality and productivity improvements in Specialty Pulp Products. These
investments are expected to help moderate the cyclical effects of the pulp
market cycle, improve bottom-of-the-cycle earnings and add value to existing
assets. See Liquidity and Capital Resources.
In 1985, Rayonier transferred substantially all of its U.S. timberlands business
to Rayonier Timberlands, L.P. (RTLP), a master limited partnership. Under the
terms of the RTLP Partnership Agreement, minority unitholders currently share
approximately 24 percent of the partnership's profits. The minority interest in
RTLP's earnings was $30 million in 1995, $32 million in 1994 and $23 million in
1993, reducing Rayonier's net income by 63 cents per share in 1995, 69 cents per
share in 1994 and 48 cents per share in 1993. Effective January 1, 2001, the
minority participation in the earnings of RTLP will be reduced from
approximately 24 percent to approximately 1 percent and Rayonier's participation
will increase from 76 percent to 99 percent.
In 1992, Rayonier permanently closed the operations at its Grays Harbor,
Washington, pulp and paper complex. The Company's two remaining sulfite pulp
mills in Port Angeles, Washington, and Fernandina Beach, Florida, face margin
pressure. The Port Angeles mill, in particular, incurs significantly higher wood
costs than facilities in other parts of the world. The viability of these
facilities will be dependent upon the strength of pulp markets, favorable
resolution of environmental issues and, for the Port Angeles mill, the return of
Northwest U.S. wood costs to a more competitive level. If the recent softening
in pulp markets continues, if pending environmental issues are not resolved
favorably or, in the case of Port Angeles, if wood costs do not become more
competitive, Rayonier may consider alternatives to operating the mills,
including restructuring or closure. At December 31, 1995, the net plant and
equipment invested at Port Angeles and Fernandina Beach totaled $87 million and
$140 million, respectively.
RESULTS OF OPERATIONS, 1995 VS. 1994
Sales and Operating Income
Sales rose 18 percent to $1.26 billion in 1995, reflecting stronger pulp selling
prices and log sales volumes. Operating income for the year was $234 million, up
38 percent from 1994.
Timber and Wood Products
Sales of Timber and Wood Products rose 7 percent to $618 million, while
operating income declined 13 percent to $141 million. The sales improvement
came in log trading and merchandising volume sold to Pacific Rim markets.
Operating income declined primarily due to lower margins on wood products
as a result of lower lumber prices and higher log costs. The favorable
effects of increased income from log trading volume and higher Southeast
U.S. stumpage prices were offset by lower volume and margins from Northwest
U.S. stumpage sales.
Log trading and merchandising sales, which include the Company's New
Zealand log sales, increased in 1995 due to higher volumes in both the U.S.
and New Zealand. In the U.S., slightly lower export prices were more than
offset by increased export volume. In New Zealand strong domestic demand
resulted in improved operating results despite higher operating costs
caused by appreciation of the New Zealand dollar.
Timberlands management and stumpage sales and margins were down in 1995, as
higher Southeast U.S. prices were more than offset by lower Northwest U.S.
prices and volume. In the Southeast U.S., increased demand from the pulp
and paper industry resulted in improved stumpage prices. Overall harvest
volume was relatively flat, in line with the Company's harvest planning
targets. In the Northwest U.S., weak export log markets resulted in a
decline in contract prices and lower customer harvest activity.
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In 1995, lumber prices declined due to reduced domestic construction
activity and higher imports of lumber from Canada. Also in 1995, wood costs
increased significantly, driven by competitive demand from the pulp and
paper industry. As a result, wood products sales and operating margins
declined from 1994.
Specialty Pulp Products
Sales of Specialty Pulp Products rose $162 million to $662 million, up 32
percent, and operating income rose $92 million to $105 million. The gains
resulted from higher sales prices for both fluff and chemical cellulose
pulp products. In addition, operating rates for the Company's three pulp
mills improved over 1994. These gains were partially offset by higher wood
and chemical costs.
In 1995, the Company took several steps to enhance the competitiveness of
the Specialty Pulp Products segment. In the third quarter, the Company
announced the relocation of its pulp research facility from Shelton,
Washington, to a new $10 million research facility at Jesup, Georgia, and
its pulp marketing group from Stamford, Connecticut, to Jesup, Georgia. In
the fourth quarter, the Company recorded a charge of $5 million related to
closing its woodyard operations at the Jesup, Georgia, pulp mill as part of
an ongoing program to reduce costs.
Other Items
In September 1995, the Company completed the sale of a majority interest in
approximately 9 percent of its New Zealand timber holdings to a timber
investment fund, which entered into a joint venture with the Company. Proceeds
were used to reduce debt. The transaction resulted in a non-recurring pretax
gain of $35 million, $24 million after-tax, or $0.80 per Common Share. Rayonier
will manage the joint venture, which involves 23,000 acres of timber on New
Zealand's North Island. The timber in the joint venture is located apart from
most of the Company's forests and the Company believes that it can be better
managed as a separate unit.
Interest expense for 1995 increased $3 million to $34 million as a result of
higher average short-term interest rates, which more than offset the benefits of
a lower average debt level.
Minority interest in the earnings of RTLP decreased $3 million to $30 million in
1995 due to lower partnership earnings resulting primarily from lower Northwest
U.S. volume and prices partly offset by higher selling prices for Southeast U.S.
stumpage. The minority participation in the earnings of RTLP will change from
approximately 24 percent to approximately 1 percent effective January 1, 2001.
Income Taxes
The 1995 effective tax rate of 31.6 percent was favorable to the 1994 rate of
35.2 percent. The improvement reflected benefits from reorganizations made
following the spin-off from ITT as well as tax benefits on increased pulp export
sales.
RESULTS OF OPERATIONS, 1994 VS. 1993
Sales and Operating Income
Sales rose 14 percent to $1.07 billion in 1994, reflecting stronger sales
volumes in each of the business segments. Operating income for the year was $169
million, up 33 percent from 1993.
Timber and Wood Products
Sales of Timber and Wood Products increased 19 percent to $578 million and
operating income rose 13 percent to $163 million. Sales and income rose
primarily due to increased stumpage volume and improved prices in the
Northwest U.S., as customers carried over higher-priced 1993 timber sales
contracts into the first quarter of 1994.
Log trading and merchandising sales, which include the Company's New
Zealand operations, increased due to higher volumes in the U.S. and New
Zealand. Strong domestic markets in both countries partially offset a
decline in log exports. Overall, margins were reduced by lower export
prices and higher purchased log costs.
Timberlands management and stumpage sales and income were stronger due to
the high-priced carryover volume in the Northwest U.S. and increased volume
and prices in the Southeast U.S. Wood products sales and operating margins
increased as a result of higher prices and a full year's contribution from
the Swainsboro-Lumber City, Georgia, facility acquired late in 1993.
Operating margins also were affected by increased wood costs in the
Southeast U.S.
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Specialty Pulp Products
Sales of Specialty Pulp Products increased to $500 million, up 8 percent,
and operating income rose $17 million to $13 million. The gains resulted
from higher sales volume and stronger fluff pulp prices in the second half
of the year.
Other Items
Interest expense increased as a result of the additional debt used to finance a
$90 million special dividend to ITT in late 1993 and to settle intercompany
accounts with ITT prior to the spin-off.
Minority interest in the earnings of RTLP increased $10 million to $32 million
in 1994 due to significantly higher partnership earnings resulting from
increased stumpage volume and prices.
Income Taxes
The 1994 effective tax rate of 35.2 percent was slightly favorable to 1993,
which was affected by the remeasurement of deferred tax liabilities for a one
percentage point increase in the corporate tax rate in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities in 1995 was $213 million, up $23 million
from 1994. The favorable change was due to higher earnings, partially offset by
increased working capital needed to sustain the higher level of economic
activity. Cash from operating activities was primarily used to finance capital
expenditures of $143 million, increase common dividends to $30 million and
reduce borrowings by $33 million.
Cash flow from operating activities in 1994 increased $71 million to $190
million. Cash from operating activities financed capital expenditures of $101
million, an increase in long-term timber stumpage of $24 million, common
dividends of $21 million, a special distribution of $20 million to the minority
unitholders of RTLP and debt reduction of $15 million.
In 1995, EBITDA (defined as earnings from continuing operations before
non-recurring items, provision for dispositions, interest expense, income taxes
and depreciation, depletion and amortization) grew to $303 million, or $10.10
per share, up $74 million from 1994. In 1994, EBITDA grew $42 million to $229
million or $7.72 per share. Free cash flow (defined as income from continuing
operations plus depreciation, depletion and amortization, deferred income taxes
and changes in working capital, less custodial capital spending and prior-year
dividend levels) increased $17 million to $107 million in 1995.
Debt in 1995 was reduced $33 million to $450 million, resulting in a year-end
debt-to-total-capital ratio of 37 percent, down from 43 percent at December 31,
1994. In 1994, debt was reduced $15 million and the debt-to-total-capital ratio
strengthened 2 percent from 1993. The percentage of debt with fixed interest
rates was 48 percent as of December 31, 1995, compared with 45 percent in 1994
and 44 percent in 1993. In addition, at December 31, 1995, the Company had
outstanding interest rate swap agreements that effectively converted $180
million of floating rate obligations to fixed rates ranging from 5.35 to 5.39
percent. The agreements commence in January 1996 and mature in 1997 and 1998.
The most restrictive long-term debt covenant in effect at December 31, 1995
provided that the ratio of total debt to EBITDA cannot exceed four to one. As of
December 31, 1995, the ratio was less than two to one. In addition, $440 million
of retained earnings was unrestricted as to the payment of dividends.
Capital spending for the year of $143 million represented a new high for the
Company, but was lower than originally planned because of a permitting delay for
the Company's planned New Zealand medium-density-fiberboard (MDF) facility.
Rayonier expects to invest approximately $395 million in capital projects during
the two-year period 1996-1997, including $125 million for the New Zealand MDF
facility, which is scheduled for completion in 1997. Other capital projects
include cost improvement and productivity programs at the Jesup, Georgia, pulp
mill. As new environmental regulations are promulgated, additional capital
spending may be required to ensure continued compliance with environmental
standards. See Environmental Regulation.
The Company has unsecured credit facilities totaling $300 million, which are
used for direct borrowings and as support for $115 million of outstanding
commercial paper. As of December 31, 1995, Rayonier had $185 million of
available borrowings under its revolving credit facilities. In addition, the
Company has on file with the Securities and Exchange Commission shelf
registration statements to offer an additional $141 million of new public debt
securities.
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The Company believes that internally generated funds, combined with available
external financing, will enable it to fund capital expenditures, working capital
and other liquidity needs for the foreseeable future.
DISPOSITIONS
In 1992, Rayonier provided $180 million, pretax, for the loss on disposal of
assets along with the costs for severance, demolition and other close-down items
associated with the disposition of its interest in the Grays Harbor, Washington,
pulp and paper complex. The Company has substantially completed all programs
associated with this charge except for certain environmental remediation
programs. In addition, in 1986, Rayonier discontinued the Southern Wood Piedmont
Company (SWP) treated wood business. Although operations have ceased, SWP is
involved in several environmental remediation programs and is in negotiations
with various state and federal agencies regarding the scope and timing for
remaining programs. Future environmental cost is dependent on the outcome of
such negotiations and may also be affected by new laws, regulations and
administrative interpretations, and changes in environmental remediation
technology. Accordingly, although considerable progress on cleanup has been
made, there is still uncertainty as to the timing and amount of future
expenditures for completing environmental programs at Grays Harbor, the SWP
sites and certain other non-operating locations.
Rayonier currently estimates that expenditures for environmental remediation
during 1996-1997 will total approximately $20 million, pretax. As of December
31, 1995, Rayonier had reserves of $40 million for environmental obligations.
The Company believes that any future changes in estimates, if necessary, will
not materially affect its financial condition or results of operations.
ENVIRONMENTAL REGULATION
Rayonier is subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal that, in the opinion of
management, will require substantial expenditures over the next ten years.
During 1995, 1994 and 1993, Rayonier spent approximately $1 million, $1 million
and $3 million, respectively, for capital projects related to environmental
compliance for continuing operations. Rayonier expects to spend approximately
$32 million on such projects during the two-year period 1996-1997. However,
federal environmental regulations governing air and water discharges that were
proposed in 1993 may require further expenditures and, if finally enacted in
their proposed form, would prevent the Company from meeting certain product
quality specifications for substantially all of its chemical cellulose products
and will increase the cost of making its remaining pulp products. Sales of
chemical cellulose products accounted for approximately 30 percent of 1995
sales.
While these regulations would have a material adverse effect on operations if
not changed, it will not be possible for Rayonier to determine the nature or
costs of such effect until the regulations are issued in final form. Rayonier
has developed order of magnitude estimates of the costs of complying with these
regulations if they are modified to remove the technological requirements that
would prevent the Company from manufacturing some of its products. These
estimates indicate that with incremental capital expenditures of approximately
$115 million at Jesup, $35 million at Fernandina Beach and $40 million at Port
Angeles, it could continue to manufacture the current product line. Such
expenditures would most likely be incurred over several years and would not
commence before 1997. Rayonier will, however, continue to argue, both
individually and through an industry trade association, for modifying the
proposed operating guidelines further to eliminate errors it believes the agency
has made, and the Company will continue to explore new and revised operating and
technical process alternatives in lieu of spending such funds. Rayonier cannot
predict whether these efforts will be successful.
Over the past five years, the harvest of timber from private lands in the state
of Washington has been restricted as a result of the listing of the northern
spotted owl as a threatened species under the Endangered Species Act (ESA).
These restrictions have caused RTLP to restructure and reschedule some of its
harvest plans. The U.S. Fish and Wildlife Service has developed a proposed rule
under the ESA to redefine protective measures for the northern spotted owl on
private lands. This rule, as currently drafted, would reduce the harvest
restrictions on private lands except within specified special emphasis areas,
where restrictions would be increased. One proposed special emphasis area is on
the Olympic Peninsula, where a significant portion of RTLP's Washington
timberlands is located. Separately, the state of Washington Forest Practices
Board is in the process of adopting new harvest regulations to protect the
northern spotted owl and the marbled murrelet (also recently listed as a
threatened species). The state Department of Natural Resources draft of this
rule also provides for a special emphasis area to protect the northern spotted
owl on the Olympic Peninsula, which would increase harvest restrictions on the
Company's lands. Rayonier is unable at this time to predict the form in which
the federal or
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state rules will eventually be adopted. However, if either rule is adopted in
the form proposed by the respective agencies, the result will be some reduction
in the volume of timber available for harvest.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on Page ii.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND F
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 with respect to directors is incorporated
herein by reference to the definitive proxy statement involving the election of
directors filed or to be filed by Rayonier with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Form 10-K.
The information called for by Item 10 with respect to executive officers is set
forth above in Part I under the caption Executive Officers of Rayonier.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the
definitive proxy statement referred to above in Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 in incorporated herein by reference to the
definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Rayonier was a wholly owned subsidiary of ITT Industries Inc. (ITT), formerly
known as ITT Corporation, through February 28, 1994. On February 28, 1994, ITT
distributed all of the Common Shares of Rayonier to the holders of ITT Common
and Series N Preferred Stock in a spin-off. As a result of the spin-off, ITT has
no ownership interest in Rayonier, and Rayonier is an independent public
company.
Rayonier and ITT entered into certain agreements, described below, governing
their relationship subsequent to the spin-off and providing for the allocation
of tax and certain other liabilities and obligations arising from periods prior
to the spin-off. Copies of the forms of such agreements were filed as exhibits
to the 1993 Form 10-K, Annual Report. The following description summarizes the
material terms of such agreements, but is qualified by reference to the texts of
such agreements, which are incorporated herein by reference.
DISTRIBUTION AGREEMENT
ITT and Rayonier entered into the Distribution Agreement providing for, among
other things, the principal corporate transactions required to effect the
Distribution and other arrangements between Rayonier and ITT related to the
spin-off. The Distribution Agreement provides for the retention by ITT of all
liabilities relating to the business conducted by ITT or any subsidiary of ITT
(excluding Rayonier and its subsidiaries) and the indemnification of Rayonier
with respect to such liabilities. The Distribution Agreement also provides for
the retention by Rayonier of all liabilities relating to the business conducted
by Rayonier and its subsidiaries (including environmental liabilities) and the
indemnification of ITT with respect to such liabilities.
-17-
21
The Distribution Agreement provides that neither ITT nor Rayonier will take any
action that would jeopardize the intended tax consequences of the transaction.
Specifically, each of ITT and Rayonier will maintain its status as a company
engaged in the active conduct of a trade or business, as defined in Section
355(b) of the Internal Revenue Code of 1986, as amended, until February 28,
1996.
TAX ALLOCATION AGREEMENT
ITT and Rayonier entered into a Tax Allocation Agreement (the Tax Allocation
Agreement) providing that Rayonier will pay its share of ITT's consolidated tax
liability for the tax years Rayonier is included in ITT's consolidated Federal
income tax return. The Agreement also provides for sharing of pre-closing state
taxes where appropriate as well as certain other matters.
EMPLOYEE BENEFITS AGREEMENT
ITT and Rayonier entered into an Employee Benefit Services and Liability
Agreement providing for the allocation of retirement, medical, disability and
other employee welfare benefit plans between ITT and Rayonier.
ADMINISTRATIVE SERVICES AGREEMENT
For the purpose of an orderly transition following the spin-off, ITT and
Rayonier entered into an Administrative Services Agreement pursuant to which,
until December 31, 1995, ITT provided to Rayonier such corporate administrative
services as Rayonier may request, and Rayonier provided to ITT similar services
with respect to particular ITT subsidiaries which were formerly the management
responsibility of Rayonier (the Administrative Services Agreement). The party
which provided any such services was compensated by the other party.
CANADIAN ASSETS PURCHASE AGREEMENT
A subsidiary of ITT and a subsidiary of Rayonier entered into a Canadian Assets
Purchase Agreement pursuant to which, on February 28, 1994 the ITT subsidiary
sold to the Rayonier subsidiary certain assets located in Canada and owned by
the ITT subsidiary which are used in the Canadian operations of Rayonier. The
purchase price was equal to the net book value of the assets purchased, which
approximated $3.2 million.
DIRECTORS
Two current ITT Directors, Messrs. Rand V. Araskog and Paul G. Kirk, Jr. are
also serving on the Board of Directors of Rayonier.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a) Documents filed as a part of this report:
1. See Index to Financial Statements on page ii for a list of the
financial statements filed as part of this report.
2. See Index to Financial Statement Schedules on page ii for a list of the
financial statement schedules filed as a part of this report.
3. See Exhibit Index on pages B, C, and D for a list of the exhibits filed
or incorporated herein as part of this report.
(b) Reports on Form 8-K:
1. The Company did not file any reports on Form 8-K during 1995.
-18-
22
REPORT OF MANAGEMENT
Rayonier management is responsible for the preparation and integrity of the
information contained in the accompanying financial statements. The statements
were prepared in accordance with generally accepted accounting principles and,
where necessary, include amounts that are based on management's best judgments.
Rayonier's system of internal controls includes accounting controls and an
internal audit program. This system is designed to provide reasonable assurance
that Rayonier's assets are safeguarded, transactions are properly recorded and
executed in accordance with management's authorization, and fraudulent financial
reporting is prevented or detected.
Rayonier's internal controls provide for the careful selection and training of
personnel and for appropriate divisions of responsibility. The controls are
documented in written codes of conduct, policies and procedures that are
communicated to Rayonier's employees. Management continually monitors the system
of internal controls for compliance. Rayonier's independent public accountants,
Arthur Andersen LLP, evaluate and test internal controls as part of their annual
audit and make recommendations for improving internal controls. Management takes
appropriate action in response to each recommendation. The Board of Directors
and the officers of Rayonier monitor the administration of Rayonier's policies
and procedures and the preparation of financial reports.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Rayonier Inc.
We have audited the accompanying consolidated financial statements of Rayonier
Inc. (a North Carolina corporation) and subsidiaries as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995, as
described in the Index to Financial Statements. These financial statements are
the responsibility of Rayonier's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rayonier Inc. and subsidiaries
as of December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 22, 1996
F-1
23
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
For the Three Years Ended December 31, 1995
(Thousands of dollars, except per share data)
1995 1994 1993
---- ---- ----
Sales $1,260,492 $1,069,494 $ 936,310
---------- ---------- ----------
Costs and expenses
Cost of sales 994,982 877,439 780,831
Selling and general expenses 37,043 28,697 28,275
Other operating (income) expenses, net (5,210) (5,989) 38
---------- ----------- ------------
1,026,815 900,147 809,144
---------- ----------- ----------
Operating income 233,677 169,347 127,166
Interest expense (33,615) (31,065) (23,368)
Interest and miscellaneous income, net 3,131 2,207 1,608
Minority interest (29,897) (32,419) (22,508)
Non-recurring gain 34,763 - -
---------- ------------- -------------
Income before income taxes 208,059 108,070 82,898
Provision for income taxes (65,711) (38,038) (30,432)
---------- ---------- ----------
Net income $ 142,348 $ 70,032 $ 52,466
========== ========== ==========
Net income per Common Share $4.75 $2.36 $1.77
===== ===== =====
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
F-2
24
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
(Thousands of dollars)
ASSETS
1995 1994
---- ----
CURRENT ASSETS
Cash and short-term investments $ 10,932 $ 9,178
Accounts receivable, less allowance for doubtful
accounts of $4,420 and $4,358 128,478 103,892
Inventories 170,078 119,739
Timber stumpage 49,464 47,338
Other current assets 15,412 12,692
Deferred income taxes 15,208 4,382
---------- ----------
Total current assets 389,572 297,221
OTHER ASSETS 47,239 42,462
TIMBER STUMPAGE 29,396 36,756
TIMBER, TIMBERLANDS AND LOGGING ROADS,
NET OF DEPLETION AND AMORTIZATION 476,463 476,132
PROPERTY, PLANT AND EQUIPMENT
Land, buildings, machinery and equipment 1,292,059 1,202,484
Less - accumulated depreciation 586,796 530,857
---------- ----------
705,263 671,627
---------- ----------
$1,647,933 $1,524,198
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-3
25
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1995 and 1994
(Thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
1995 1994
---- ----
CURRENT LIABILITIES
Accounts payable $ 102,938 $ 83,658
Bank loans and current maturities 3,040 302
Accrued taxes 9,941 7,676
Accrued payroll and benefits 26,554 20,043
Accrued interest 5,268 4,515
Other current liabilities 39,943 37,316
Current reserves for dispositions 16,047 25,370
---------- ----------
Total current liabilities 203,731 178,880
DEFERRED INCOME TAXES 160,574 127,638
LONG-TERM DEBT 446,696 482,920
NON-CURRENT RESERVES FOR DISPOSITIONS 23,542 33,348
OTHER NON-CURRENT LIABILITIES 25,204 23,695
MINORITY INTEREST 18,815 22,516
SHAREHOLDERS' EQUITY
Common Shares, 60,000,000 shares authorized,
29,653,278 and 29,574,807 shares issued
and outstanding 159,032 157,581
Retained earnings 610,339 497,620
---------- ----------
769,371 655,201
---------- ----------
$1,647,933 $1,524,198
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
F-4
26
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
For the Three Years Ended December 31, 1995
(Thousands of dollars)
1995 1994 1993
---- ---- ----
Balance, beginning of year $ 497,620 $ 448,878 $ 518,252
Net income 142,348 70,032 52,466
Dividends to public shareholders (29,629) (21,290) --
Dividends to ITT -- -- (121,840)
--------- --------- ---------
Balance, end of year $ 610,339 $ 497,620 $ 448,878
========= ========= =========
STATEMENTS OF CONSOLIDATED COMMON SHARES
For the Three Years Ended December 31, 1995
(Thousands of dollars, except for shares)
Common Shares
-----------------------
Shares Amount
---------- ----------
Balance, January 1, 1993 29,565,392 $ 157,426
---------- ----------
Balance, December 31, 1993 29,565,392 157,426
Common Shares issued under incentive stock plans 9,415 155
---------- ----------
Balance, December 31, 1994 29,574,807 157,581
Common Shares issued under incentive stock plans 78,471 1,451
---------- ----------
Balance, December 31, 1995 29,653,278 $ 159,032
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-5
27
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Three Years Ended December 31, 1995
(Thousands of dollars)
1995 1994 1993
---- ---- ----
OPERATING ACTIVITIES
Net income $ 142,348 $ 70,032 $ 52,466
Non-cash items included in income
Depreciation, depletion and amortization 95,988 90,200 78,272
Deferred income taxes 16,617 3,007 37,291
Disposition of New Zealand timber assets 9,440 -- --
Increase (decrease) in other non-current liabilities 1,509 7,954 (10,284)
Change in accounts receivable, inventories and accounts payable (55,645) 8,499 (5,887)
(Increase) decrease in current timber stumpage (2,126) 8,432 (15,226)
Increase (decrease) in accrued taxes 2,265 5,196 (2,883)
Change in reserves for dispositions (4,933) (5,221) 2,679
Other changes 7,171 1,633 (18,119)
--------- --------- ---------
Cash from operating activities 212,634 189,732 118,309
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures, net of sales and retirements
of $3,931, $1,678 and $167 (139,395) (98,953) (71,589)
Expenditures for dispositions, net of tax benefits
of $5,493, $4,571 and $10,318 (9,352) (7,713) (17,412)
Change in timber stumpage and other assets 3,232 (29,690) (6,179)
--------- --------- ---------
Cash used for investing activities (145,515) (136,356) (95,180)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of debt 35,437 267,084 112,435
Repayments of debt (68,923) (282,003) (17,698)
Dividends to ITT -- -- (121,840)
Dividends to public shareholders (29,629) (21,290) --
Issuance of Common Shares 1,451 155 --
Decrease in minority interest (3,701) (14,133) (768)
--------- --------- ---------
Cash used for financing activities (65,365) (50,187) (27,871)
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS
Increase (decrease) in cash and short-term investments 1,754 3,189 (4,742)
Balance, beginning of year 9,178 5,989 10,731
--------- --------- ---------
Balance, end of year $ 10,932 $ 9,178 $ 5,989
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid (received) during the year for:
Interest $ 34,208 $ 30,996 $ 24,289
========= ========= =========
Income taxes, net of refunds $ 41,760 $ 23,705 $ (18,193)
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-6
28
RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless otherwise stated)
1. NATURE OF BUSINESS OPERATIONS
On February 28, 1994, ITT Industries, Inc. (ITT), formerly known as ITT
Corporation, distributed all outstanding Common Shares of Rayonier Inc.
(Rayonier or the Company) to ITT stockholders, resulting in Rayonier becoming an
independent, publicly held company.
Rayonier operates in two major industry segments, Specialty Pulp Products and
Timber and Wood Products.
Specialty Pulp Products
Rayonier operates three pulp mills in the United States with an aggregate annual
capacity of 826,000 metric tons. Rayonier is a leading specialty manufacturer of
high-grade chemical cellulose, often called dissolving pulp, from which
customers produce a wide variety of products, including textiles, industrial and
filtration fibers, plastics and other chemical intermediate products. Rayonier
also manufactures fluff pulps that customers use to produce diapers and other
sanitary products, and specialty paper pulps used in the manufacture of products
such as filters and decorative laminates. Over half of Rayonier's pulp
production is sold to export customers, primarily in Western Europe and the Far
East.
The Company's two sulfite pulp mills in Port Angeles, Washington, and Fernandina
Beach, Florida, face margin pressure. The Port Angeles mill, in particular,
incurs significantly higher wood costs than facilities in other parts of the
world. The viability of these facilities will be dependent upon the strength of
pulp markets, favorable resolution of environmental issues and, for the Port
Angeles mill, the return of Northwest U.S. wood costs to a more competitive
level. If the recent softening in pulp markets continues, if pending
environmental issues are not resolved favorably or, in the case of Port Angeles,
if wood costs do not become more competitive, Rayonier may consider alternatives
to operating the mills, including restructuring or closure. At December 31,
1995, the net plant and equipment invested at Port Angeles and Fernandina Beach
totaled $87,068 and $140,497, respectively.
Timber and Wood Products
The Company owns, buys and harvests timber stumpage, and purchases delivered
logs, primarily in North America and New Zealand, for subsequent sale into
export markets (primarily Japan, Korea and China), as well as to domestic lumber
and pulp mills. Rayonier owns, leases or controls 1.47 million acres of
timberland in the United States and New Zealand. Rayonier also operates three
lumber manufacturing facilities that produce dimension and specialty lumber
products for residential construction and industrial uses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Rayonier and its
subsidiaries. Minority interest represents public unitholders' proportionate
share of the partners' capital of Rayonier's consolidated subsidiary, Rayonier
Timberlands, L.P. (RTLP). All significant intercompany balances and
transactions are eliminated.
Certain reclassifications have been made to prior years' financial statements to
conform to the current year's presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of certain estimates by management (e.g.,
useful economic lives of assets) in determining the reported amount of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. Actual results could differ
from those estimates.
F-7
29
Cash and Short-Term Investments
Cash and short-term investments include cash, time deposits and readily
marketable debt securities with original maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market. The cost of pulp products
is determined on the first-in, first-out (FIFO) basis. Timber and wood products
are generally valued on an average cost basis. Inventory costs include material,
labor and manufacturing overhead. Physical counts of inventories are made at
least annually. Potential losses from obsolete, excess or slow-moving
inventories are provided currently.
Timber Stumpage and Timber Cutting Contracts
Rayonier purchases timber stumpage for use in its log trading, pulp and wood
products businesses. The purchases are classified as current assets for stumpage
expected to be harvested within one year of the balance sheet date. The
remainder is classified as a non-current asset.
Rayonier evaluates the realizability of timber stumpage and timber cutting
contracts based on the estimated aggregate cost of such harvests and the sales
values to be realized. Losses are recorded in the period that a determination is
made that the aggregate harvest costs in a major operating area will not be
recoverable.
Timber and Timberlands
The acquisition cost of land, timber, real estate taxes, lease payments, site
preparation and other costs relating to the planting and growing of timber are
capitalized. Such accumulated costs attributed to merchantable timber are
charged against revenue at the time the timber is harvested based on the
relationship of harvested timber to the estimated volume of currently
recoverable merchantable timber. Timber and timberlands are stated at the lower
of original cost, net of timber cost depletion, or market value.
Property, Plant and Equipment
Property, plant and equipment additions are recorded at cost, which includes
applicable freight, taxes, interest, construction and installation costs.
Interest capitalized in connection with major construction projects amounted to
$1,346, $194 and zero during 1995, 1994 and 1993, respectively. Upon ordinary
retirement or sale of property, accumulated depreciation is charged with the
cost of the property removed and credited with the proceeds of salvage value,
with no gain or loss recognized. Gains and losses with respect to any
significant and unusual retirements of assets are included in operating income.
Depreciation
Pulp manufacturing facilities are generally depreciated using the units of
production method. Depreciation on buildings and other equipment is provided on
a straight-line basis over the useful economic lives of the assets involved.
Rayonier normally claims the maximum depreciation deduction allowable for tax
purposes.
Research and Development
Significant costs are incurred for research and development programs expected to
contribute to the profitability of future operations. Such costs are expensed as
incurred. Research and development expenditures amounted to $8,442, $7,477 and
$7,302 in 1995, 1994 and 1993, respectively.
Income Taxes
Income taxes on foreign operations are provided based upon the statutory tax
rates of the applicable foreign country. Additional U.S. income taxes have not
been provided on approximately $51,000 of undistributed foreign earnings as the
Company intends to permanently reinvest such earnings in expanding foreign
operations.
F-8
30
Earnings per Common Share
Earnings per Common Share are determined based on the weighted average number of
Common Shares and dilutive Common Shares outstanding during the period. Earnings
per Common Share for 1993 and from January 1, 1994 to February 28, 1994 were
computed based on the number of Rayonier Common Shares that were outstanding on
February 28, 1994, the date of Rayonier's spin-off from ITT. Common stock
equivalents were excluded from the 1993 computation due to immateriality. The
number of Common Shares used in earnings per Common Share computations was
29,982,883, 29,697,054 and 29,565,392 for 1995, 1994 and 1993, respectively.
Foreign Currency Translation
For significant foreign operations, including Rayonier's New Zealand-based
operations, the U.S. dollar is the functional currency. Monetary assets and
liabilities of foreign subsidiaries are translated into U.S. dollars at current
exchange rates. Non-monetary assets such as inventories, timber and property,
plant and equipment are translated at historical rates. Income and expense items
are translated at average exchange rates prevailing during the year, except that
inventories, depletion and depreciation charged to operations are translated at
historical rates. Exchange gains and losses arising from translation are
recognized currently in Interest and miscellaneous income, net.
3. UNUSUAL ITEMS
In September 1995, the Company completed the sale of a majority interest in
approximately 9 percent of its New Zealand timber holdings to a timber
investment fund, which entered into a joint venture with the Company. Proceeds
were used to reduce debt. The transaction resulted in a non-recurring pretax
gain of $34,763, $23,946 after-tax, or $0.80 per Common Share. Rayonier will
manage the joint venture, which involves 23,000 acres of timber on New Zealand's
North Island.
4. RAYONIER TIMBERLANDS, L.P.
In 1985, Rayonier transferred substantially all of its U.S. timberlands business
to Rayonier Timberlands, L.P., a master limited partnership, in exchange for 20
million Class A and 20 million Class B Depositary Units. Thereafter, Rayonier
offered and sold 5.06 million Class A Units (25.3 percent) to the public. The
Partnership Agreement provides that RTLP continues in existence until December
31, 2035, but that the Initial Term of the Partnership will end on December 31,
2000. Class A Units participate principally in the revenues and costs associated
with RTLP's sales of timber through the Initial Term and to a significantly
lesser extent in subsequent periods. RTLP's sales of timber after that date as
well as cash flow associated with land management activities before and after
that date are principally allocable to the Class B Units, all of which have been
retained by Rayonier.
RTLP is included in these consolidated financial statements. The following
table summarizes the sales and operating income of RTLP, for the three years
ended December 31, 1995, by region.
1995 1994 1993
---- ---- ----
SALES
Northwest U.S. $ 95,168 $115,261 $ 70,734
Southeast U.S. 65,100 51,260 45,313
-------- -------- --------
$160,268 $166,521 $116,047
======== ======== ========
OPERATING INCOME
Northwest U.S. $ 73,393 $ 94,576 $ 56,249
Southeast U.S. 51,693 39,157 33,457
Corporate and other (1,778) (1,724) (2,308)
-------- -------- --------
$123,308 $132,009 $ 87,398
======== ======== ========
The minority interest in RTLP's earnings was $29,897, $32,419 and $22,508 in
1995, 1994 and 1993, respectively. This reduced Rayonier's net income by
$18,985, $20,586 and $14,293 in 1995, 1994 and 1993, respectively. Effective
January 1, 2001, the minority participation in the earnings of RTLP will be
reduced from approximately 24 percent to approximately 1 percent, and Rayonier's
participation will increase from 76 percent to 99 percent.
F-9
31
5. INCOME TAXES
For periods prior to the February 28, 1994 spin-off, Rayonier computed its tax
provision at statutory rates in accordance with tax-sharing arrangements with
ITT. In 1993, the federal statutory corporate income tax rate was increased from
34 percent to 35 percent. As a result, the 1993 provision for income taxes
included a charge of $1,583 to remeasure the Company's deferred tax liability
for the higher rate.
The provision for income taxes consists of the following:
1995 1994 1993
---- ---- ----
Current:
U.S. federal $ 36,564 $ 30,018 $(18,530)
State and local 2,779 2,157 (1,216)
Foreign 4,258 (1,715) 2,569
-------- -------- --------
43,601 30,460 (17,177)
-------- -------- --------
Deferred:
U.S. federal 12,386 6,288 39,713
State and local 1,081 318 3,292
Foreign 8,643 972 4,604
-------- -------- --------
22,110 7,578 47,609
-------- -------- --------
$ 65,711 $ 38,038 $ 30,432
======== ======== ========
Deferred income taxes represent the tax effects related to recording revenues
and expenses in different periods for financial reporting and tax return
purposes. Deferred tax assets (liabilities) at December 31, 1995 and 1994 were
related to the following principal timing differences:
1995 1994
---- ----
Accelerated depreciation $(129,332) $(126,663)
Reserves for dispositions 14,450 16,700
All other, net (30,484) (13,293)
--------- ---------
$(145,366) $(123,256)
========= =========
A reconciliation of the income tax provision at the U.S. statutory rate to the
provision for income taxes as reported is as follows:
1995 1994 1993
---- ---- ----
Income tax provision at U.S. statutory rate $ 72,821 $ 37,825 $ 29,014
State and local taxes, net of federal tax benefit 2,509 1,609 1,349
Foreign operations (4,697) (1,670) (285)
Foreign sales corporations (3,816) (608) (1,500)
Remeasurement of deferred tax liability -- -- 1,583
All other, net (1,106) 882 271
-------- -------- --------
Provision for income taxes $ 65,711 $ 38,038 $ 30,432
======== ======== ========
All other, net includes tax provision adjustments for permanent differences, tax
credits and other items that are not individually significant.
F-10
32
6. INVENTORIES
Rayonier's inventories included the following at December 31, 1995 and 1994:
1995 1994
---- ----
Finished goods $ 71,307 $ 39,929
Work in process 25,681 18,221
Raw materials 44,350 34,022
Manufacturing and maintenance supplies 28,740 27,567
-------- --------
$170,078 $119,739
======== ========
7. RESERVES FOR DISPOSITIONS
In 1992, Rayonier provided $180,000, pretax, for the loss on disposal of assets
along with the costs for severance, demolition and other close-down items
associated with the disposition of its interest in the Grays Harbor, Washington,
pulp and paper complex. The Company has substantially completed all programs
associated with this charge except for certain environmental remediation
programs. In addition, in 1986, Rayonier discontinued the Southern Wood Piedmont
Company (SWP) treated wood business. Although operations have ceased, SWP is
involved in several environmental remediation programs and is in negotiations
with various state and federal agencies regarding the scope and timing for
remaining programs. Future environmental cost is dependent on the outcome of
such negotiations and may also be affected by new laws, regulations and
administrative interpretations, and changes in environmental remediation
technology. Accordingly, although considerable progress on cleanup has been
made, there is still uncertainty as to the timing and amount of future
expenditures for completing environmental programs at Grays Harbor, the SWP
sites and certain other non-operating locations.
As of December 31, 1995 and 1994, Rayonier had $11,539 and $11,401 of
receivables from insurance claims included in Other assets. Such receivables
represent the Company's claim for reimbursements in connection with property
damage settlements relating to SWP's discontinued wood preserving operations.
Rayonier currently estimates that expenditures for environmental remediation
during 1996-1997 will total approximately $20,000, pretax. As of December 31,
1995, Rayonier had reserves of $39,589 for environmental obligations. The
Company believes that any future changes in estimates, if necessary, will not
materially affect its financial condition or results of operations.
F-11
33
8. DEBT
Rayonier's debt included the following at December 31, 1995 and 1994:
1995 1994
---- ----
Short-term bank loans at a weighted average rate of 6.3% $ 18,816 $ 84
Commercial paper at discount rates of 6.05% to 6.13% 115,000 100,000
Medium-term notes due 1996-1998 at variable interest rates 100,000 100,000
Medium-term notes due 1998-1999 at fixed interest rates
of 5.84% to 6.16% 16,000 16,000
Variable rate revolving credit agreement due 1999 -- 67,000
7.5% notes due 2002 110,000 110,000
Pollution control and industrial revenue bonds
due 1996-2015 at fixed interest rates of 4.75% to 8.0% 89,275 89,345
All other 645 793
-------- --------
Total debt 449,736 483,222
Less:
Short-term bank loans 2,516 84
Current maturities 524 218
-------- --------
Long-term debt $446,696 $482,920
======== ========
Rayonier has revolving credit agreements with a group of banks that provide the
Company with unsecured credit facilities totaling $300,000 and expiring in 1996
and 2000. The revolving credit facilities are used for direct borrowings and as
credit support for a commercial paper program. As of December 31, 1995, the
Company had $115,000 of outstanding commercial paper, no outstanding direct
borrowings and $185,000 of available borrowings under its revolving credit
facilities.
On October 15, 1992, Rayonier issued $110,000 of 7.5 percent notes due October
15, 2002 (the Notes). The Notes were issued pursuant to a registration
statement, filed on Form S-3 effective September 29, 1992, which permitted the
Company to issue up to $250,000 in debt securities through public offerings. The
Company used the net proceeds from the sale of the Notes to repay bank debt that
was utilized as bridge financing for the purchase of forest assets in New
Zealand. Subsequently, on April 5, 1993, the Company established a $140,000
medium-term note program pursuant to the registration. During April 1993,
$16,000 of medium-term notes, maturing in 1998 and 1999, were issued under this
program at fixed interest rates of 5.84 percent to 6.16 percent.
On March 29, 1994, the Company filed a shelf registration statement with the
Securities and Exchange Commission on Form S-3 covering $150,000 of new debt
securities. The registration statement also served as a post-effective amendment
to the 1992 registration statement, which, as amended, permitted Rayonier to
offer up to $174,000 of medium-term notes. On August 18, 1994, Rayonier issued
$100,000 of variable rate medium-term notes. An additional $33,000 of
medium-term notes were issued in 1995 to replace maturing notes. The notes
outstanding as of December 31, 1995 mature in 1996, 1997 and 1998 and bear
interest at a variable rate of three-month LIBOR plus 0.29 percent to 0.40
percent. As of December 31, 1995, the interest rates on the variable rate
medium-term notes ranged from 6.10 percent to 6.34 percent. The proceeds of
these notes were used to retire a variable rate term loan. In addition, through
currently effective shelf registration statements filed with the Securities and
Exchange Commission, Rayonier may offer up to $141,000 of new public debt
securities.
F-12
34
Required repayments of debt are as follows:
1996 $ 3,040
1997 36,229
1998 36,342
1999 17,475
2000 166,720
2001-2015 189,930
----------
$ 449,736
==========
Medium-term notes, commercial paper and short-term bank loans totaling $164,300
are classified as long-term debt because the Company has the ability and intends
to refinance such maturities through continued short-term borrowings, available
committed credit facilities or long-term borrowings. The most restrictive
long-term debt covenant in effect at December 31, 1995 provided that the ratio
of total debt to EBITDA not exceed four to one. As of December 31, 1995, the
ratio was less than two to one. In addition, $440,000 of retained earnings was
unrestricted as to the payment of dividends.
9. INTEREST RATE SWAP AGREEMENTS
Rayonier uses interest rate swap agreements to manage exposure to interest rate
fluctuations. Outstanding agreements involve the exchange of floating rate
interest payments for fixed rate interest payments over the life of the
agreement without the exchange of any underlying principal amounts. Rayonier's
credit exposure is limited to the fair value of the agreements, and the Company
only enters into agreements with highly rated counterparties. The Company does
not enter into interest rate swap agreements for trading or speculative purposes
and matches the terms and contract notional amounts to existing debt or debt
expected to be refinanced. The net amounts paid or received under interest rate
swap agreements are recognized as an adjustment to interest expense.
In December 1995, the Company entered into interest rate swap agreements that
effectively convert $180,000 of floating rate obligations to fixed rates ranging
from 5.35 to 5.39 percent. The agreements commence in January 1996 and mature
during 1997 and 1998. Aggregate notional principal associated with these
maturities is $55,000 in 1997 and $125,000 in 1998.
10. SHAREHOLDERS' EQUITY
Dividends paid by Rayonier during 1995, 1994 and 1993 were $29,629, $21,290 and
$121,840, respectively. The 1993 amount includes a fourth quarter special
dividend of $90,000 that was paid to ITT pursuant to a recapitalization program.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1995 and 1994, the estimated fair values of Rayonier's financial
instruments were as follows:
1995 1994
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and short-term investments $ 10,932 $ 10,932 $ 9,178 $ 9,178
Debt 449,736 464,999 483,222 473,722
Foreign currency contracts (247) (247) -- --
Interest rate swap agreements -- (460) -- --
Rayonier uses the following methods and assumptions in estimating the fair value
of its financial instruments:
Cash and Short-Term Investments
The carrying amount is equal to fair market value.
F-13
35
Debt
The Company's short-term bank loans and floating rate debt approximate fair
value. The fair value of fixed rate long-term debt is based upon quoted market
prices for these or similar issues, or rates currently available to the Company
for debt with similar terms and maturities.
Foreign Currency Contracts
The fair value of foreign currency contracts is based on dealer-quoted market
prices of comparable instruments.
Interest Rate Swap Agreements
The fair value of interest rate swap agreements is based upon the estimated cost
to terminate the agreements, taking into account current interest rates and
creditworthiness of the counterparties.
12. INCENTIVE STOCK PLANS
The 1994 Rayonier Incentive Stock Plan (the 1994 Plan) provides for the grant of
incentive stock options, non-qualified stock options, stock appreciation rights,
performance shares and restricted stock, subject to certain limitations. In
1995, the Company granted 6,000 restricted shares and 346,000 options under the
plan. In 1994, 350,000 options were granted under this plan. In 1995 and 1994,
82,500 and 88,500 Common Shares, respectively, were reserved for contingent
performance shares. The actual number of performance shares to be issued is
dependent upon the Company's Total Shareholder Return, as defined, compared with
a competitive peer group of 12 companies within the forest products industry.
The Company recognized expense of $2,338 and $311 in 1995 and 1994,
respectively, related to the 1994 plan.
During 1994, the Company also implemented a Substitute Stock Option Plan under
which options to acquire 382,434 Common Shares of Rayonier were granted in
substitution for canceled ITT options. The Rayonier options were granted at
exercise prices of $16.57 to $31.35 per share, which maintained the same
economic value to the option holders that they would have had under ITT's stock
option plan.
Stock option activity is summarized as follows:
Number of Shares Option Price
---------------- ------------
Outstanding - December 31, 1993 --- ---
Granted
Substitute Stock Option Plan 382,434 $16.57-31.35
1994 Incentive Stock Plan 350,000 $28.88-31.00
Exercised (9,415) $16.57
Canceled (2,000) $28.88
-------- ------------
Outstanding - December 31, 1994 721,019 $16.57-31.35
Granted
1994 Incentive Stock Plan 346,000 $30.00-33.50
Exercised (72,471) $16.57-31.35
Canceled (19,934) $28.88-31.35
------- -----------
Outstanding - December 31, 1995 974,614 $16.57-33.50
======= ===========
Exercisable - December 31, 1995 264,140 $16.57-31.35
======= ===========
13. EMPLOYEE BENEFIT PLANS
Employee benefit plan liabilities are estimated 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 these estimates to change.
F-14
36
Pension Plans
Rayonier has pension plans covering substantially all of its employees. The cost
is borne by Rayonier. Certain plans are subject to union negotiation. Prior to
March 1, 1994, Rayonier's salaried employees participated in the ITT Salaried
Retirement Plan. The liability associated with employment under the ITT Salaried
Retirement Plan was retained by ITT. Effective March 1, 1994, Rayonier
established the Rayonier Investment and Savings Plan for Salaried Employees and
the Rayonier Salaried Employees Retirement Plan. These plans, as well as health
care, life insurance and other employee welfare benefits programs, which
represent mirror-image plans to the various ITT welfare benefit programs
previously available to salaried employees, are sponsored by Rayonier for the
benefit of all salaried active employees as of March 1, 1994. There was no
change in the status of the Rayonier benefit plans for hourly paid employees as
a result of the spin-off.
The following table sets forth net periodic pension cost of Rayonier plans and
total pension expense for the three years ended December 31:
1995 1994 1993
---- ---- ----
Defined Benefit Plans
Service cost $ 4,022 $ 4,152 $ 1,567
Interest cost 6,348 5,666 5,573
Return on assets (23,105) (4,409) (13,138)
Net amortization and deferral 15,463 (2,756) 6,276
-------- -------- --------
Net periodic pension cost of Rayonier plans 2,728 2,653 278
Other Pension Cost
Rayonier portion of ITT Salaried
Retirement Plan -- 530 2,581
Defined contribution plans 1,872 1,581 1,459
-------- -------- --------
Total pension expense $ 4,600 $ 4,764 $ 4,318
======== ======== ========
The following table sets forth the funded status of the Rayonier pension plans,
the amounts recognized in the balance sheets of the Company at December 31, 1995
and 1994 and the principal weighted average assumptions inherent in their
determination:
1995 1994
---- ----
Actuarial present value of benefit obligations
Vested benefits $ 85,300 $ 69,842
========= =========
Accumulated benefits $ 90,874 $ 73,569
========= =========
Projected benefits $ 92,386 $ 73,993
Plan assets at fair value 101,698 81,597
--------- ---------
Plan assets in excess of projected benefits 9,312 7,604
Unrecognized net (gain) loss (3,336) 1,676
Unrecognized past service cost 7,460 5,139
Unrecognized net assets (4,505) (5,695)
--------- ---------
Prepaid pension asset $ 8,931 $ 8,724
========= =========
Actuarial assumptions (%)
Discount rate 7.50 8.50
Rate of return on invested assets 9.75 9.75
Salary increase assumption 5.00 5.00
Postretirement Health and Life
Rayonier provides health care and life insurance benefits for certain employees
upon retirement. A reserve of $3,924 was transferred from ITT to Rayonier in
1994 to cover the postretirement benefit obligation for active employees as of
March 1, 1994. The Company is not currently funding this obligation; however, it
may fund some portions in the future if it can be accomplished on a
tax-effective basis. The liability for employees retiring prior to March 1, 1994
was retained by ITT.
F-15
37
The following table sets forth postretirement health care and life insurance
benefits expense for the three years ended December 31:
1995 1994 1993
---- ---- ----
Service cost $ 598 $ 618 $ 260
Interest cost 1,847 1,642 766
Net amortization and deferral 319 448 --
------ ------ ------
Net periodic expense of Rayonier plans 2,764 2,708 1,026
Rayonier portion of expense for
ITT Plans for salaried employees -- 212 1,146
------ ------ ------
Total postretirement benefits expense $2,764 $2,920 $2,172
====== ====== ======
The following table sets forth the status of the Rayonier postretirement benefit
plans other than pensions, the amounts recognized in the balance sheets of the
Company at December 31, 1995 and 1994 and the principal weighted average
assumptions inherent in their determination:
1995 1994
---- ----
Accumulated postretirement benefit obligation $ 24,903 $ 22,364
Unrecognized net loss (8,111) (7,214)
Unrecognized prior service cost (173) --
-------- --------
Liability recognized in the balance sheet $ 16,619 $ 15,150
======== ========
Actuarial assumptions (%)
Discount rate 7.50 8.50
Ultimate health care trend rate 5.00 6.00
The assumed rate of future increases in the per capita cost of health care (the
health care trend rate) was 10.0 percent for 1995, decreasing ratably to 5.0
percent in the year 2001. Increasing the table of health care trend rates by one
percentage point per year would have the effect of increasing the accumulated
postretirement benefit obligation by $2,009 and the annual expense by $232.
14. COMMITMENTS
The Company leases certain buildings, machinery and equipment under various
operating leases. As of December 31, 1995, minimum rental commitments under
operating leases were $4,903, $4,468, $2,146, $1,660 and $1,607 for 1996, 1997,
1998, 1999 and 2000, respectively. For the remaining years, such commitments
amounted to $6,225, aggregating total minimum lease payments of $21,009. Total
rental expense for operating leases amounted to $7,373, $6,068 and $5,587 in
1995, 1994 and 1993, respectively. The Company has indirectly guaranteed
approximately $6,715 of debt that is secured by equipment used by two vendors to
provide products to the Company.
15. LEGAL PROCEEDINGS
Rayonier and SWP are named defendants in three pending civil cases arising out
of former wood preserving operations at SWP's plant located in Augusta, Georgia,
and one pending civil case arising out of such operations at SWP's plant in
Macon, Georgia. In general, all of these cases seek recovery for property
damage, personal injury or wrongful death based on the alleged exposure to toxic
chemicals used by SWP in its former operations. Two of these cases are pending
in the U.S. District Court for the Southern District of Georgia, one is pending
in the U.S. District Court for the Middle District of Georgia and summary
judgment in favor of Rayonier and SWP in the fourth case is now under appeal to
the U.S. Court of Appeals for the 11th Circuit. One of the cases pending in
District Court, Ernest Jordan v. Southern Wood Piedmont Co., et al., seeks
damages in the amount of $700,000 ($200,000 in property damage and $500,000 in
punitive damages); the Court has disposed of the plaintiffs' claim of class
action and, in response, the plaintiffs have amended their complaint by adding
over 100 individual residents. Counsel for the Company believe that the Company
has meritorious defenses in all these cases. Several previous lawsuits related
to the Augusta and Macon facilities have either been dismissed or settled for
amounts not material to the Company.
F-16
38
Rayonier has been named a Potentially Responsible Party (PRP) or is a defendant
in actions being brought by a PRP in four proceedings instituted by the U.S.
Environmental Protection Agency (EPA) under the Comprehensive Environmental
Response Compensation and Liability Act (CERCLA) or state agencies under
comparable state statutes. In three of these proceedings, Rayonier is considered
a de minimis participant. In the other proceeding, the Company is not a de
minimis participant because of the limited number of PRPs, and the Company
believes that its share of liability for total clean-up costs will be less than
$3,000. In each case, Rayonier has established reserves for its estimated
liability. Rayonier has also received requests for information from the EPA in
connection with two other CERCLA sites, but the Company does not currently know
to what extent, if at all, liability under CERCLA will be asserted against
Rayonier with respect to either site.
On November 19, 1994, SWP was named one of six PRPs in the Tennessee Products
Site CERCLA action. SWP was included in the action because of coal tar
derivative deposits found in Chattanooga Creek, which is included as part of the
Tennessee Products Site. Counsel for the Company believe that the site is
geographically divisible and that SWP is not responsible for any clean-up costs
upstream of its former plant site. Consequently, it is not yet clear what, if
any, remediation will be required of SWP.
There are various other lawsuits pending against or affecting Rayonier and its
subsidiaries, some of which involve claims for substantial sums. Rayonier's
ultimate liability with respect to all pending actions is not expected to
materially impact its consolidated financial position or results of operations.
16. ENVIRONMENTAL MATTERS
Rayonier is subject to stringent environmental laws and regulations concerning
air emissions, water discharges and waste disposal that, in the opinion of
management, will require substantial expenditures over the next ten years.
Federal environmental regulations governing air and water discharges that were
proposed in 1993 may require further expenditures and, if finally enacted in
their proposed form, would prevent the Company from meeting certain product
quality specifications for substantially all of its chemical cellulose products,
and will increase the cost of making its remaining pulp products. Sales of
chemical cellulose products accounted for approximately 30 percent of 1995
sales. While these regulations would have a material adverse effect on
operations if not changed, it will not be possible for Rayonier to determine the
nature or costs of such effect until the regulations are issued in final form.
Over the past five years, the harvest of timber from private lands in the state
of Washington has been restricted as a result of the listing of the northern
spotted owl as a threatened species under the Endangered Species Act (ESA).
These restrictions have caused RTLP to restructure and reschedule some of its
harvest plans. The U.S. Fish and Wildlife Service has developed a proposed rule
under the ESA to redefine protective measures for the northern spotted owl on
private lands. This rule, as currently drafted, would reduce the harvest
restrictions on private lands except within specified special emphasis areas,
where restrictions would be increased. One proposed special emphasis area is on
the Olympic Peninsula, where a significant portion of RTLP's Washington
timberlands is located. Separately, the state of Washington Forest Practices
Board is in the process of adopting new harvest regulations to protect the
northern spotted owl and the marbled murrelet (also recently listed as a
threatened species). The state Department of Natural Resources draft of this
rule also provides for a special emphasis area to protect the northern spotted
owl on the Olympic Peninsula, which would increase harvest restrictions on the
Company's lands. Rayonier is unable at this time to predict the form in which
the federal or state rules will eventually be adopted. However, if either rule
is adopted in the form proposed by the respective agencies, the result will be
some reduction in the volume of timber available for harvest.
F-17
39
17. SEGMENT INFORMATION
Please refer to Items 6 and 7 where information regarding business segment sales
and operating income is provided. Additional segment information for the three
years ended December 31 is as follows (millions of dollars):
Depreciation,
Gross Plant Additions Depletion and Amortization Identifiable Assets
---------------------- -------------------------- ----------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ----
Timber and Wood Products $ 72 $ 42 $ 30 $ 26 $ 25 $ 21 $ 737 $ 685 $ 649
Specialty Pulp Products 68 58 41 69 64 56 846 787 794
Corporate and other 3 1 1 1 1 1 49 37 31
Dispositions -- -- -- -- -- -- 16 15 14
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $ 143 $ 101 $ 72 $ 96 $ 90 $ 78 $1,648 $1,524 $1,488
====== ====== ====== ====== ====== ====== ====== ====== ======
Geographical Operating Information -- All Segments (millions of dollars)
Sales Operating Income Identifiable Assets
--------------------------- ----------------------------- ---------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ----
United States $ 1,126 $ 945 $ 839 $ 222 $ 160 $ 103 $ 1,393 $ 1,291 $ 1,261
New Zealand 106 98 93 13 12 27 237 222 226
All other 28 26 4 (1) (3) (3) 18 11 1
------- ------- ------- ------- ------- ------- ------- ------- -------
Total $ 1,260 $ 1,069 $ 936 $ 234 $ 169 $ 127 $ 1,648 $ 1,524 $ 1,488
======= ======= ======= ======= ======= ======= ======= ======= =======
Export Sales -- All Segments (millions of dollars)
Sales of products produced in various countries for export to other countries
consisted of the following:
Operating Sales
Location Destination 1995 1994 1993
- --------- ----------- ---- ---- ----
United States Asia Pacific $368 $266 $282
Western Europe 146 108 109
All other 102 68 62
---- ---- ----
616 442 453
New Zealand Asia Pacific 61 54 67
Western Europe -- -- 4
All other 3 7 2
---- ---- ----
64 61 73
All other 14 20 4
---- ---- ----
Total $694 $523 $530
==== ==== ====
18. NEW ZEALAND - RELATED FOREIGN CURRENCY EXPOSURE AND RISK MANAGEMENT
A significant portion of the revenue from Rayonier's New Zealand operations is
in U.S. dollars or significantly affected by the New Zealand dollar/U.S. dollar
exchange rate. However, most of its cash operating costs are incurred in New
Zealand dollars with New Zealand dollar expenses exceeding New Zealand dollar
revenues.
F-18
40
During 1995, Rayonier entered into forward exchange contracts to help mitigate
the adverse impact of foreign currency fluctuations on the Company's New Zealand
net currency exposure. To date, Rayonier's forward contracts were intended to
cover anticipated operating needs and therefore did not "hedge" firm contracts
or commitments in accordance with Statement of Financial Accounting Standards
No. 52. As a result, the gains and losses on these contracts are included in
income based on mark to market values at reporting dates. In 1995, the maximum
foreign currency contracts outstanding at any point in time totaled $59,470. At
December 31, 1995, the Company held foreign currency contracts maturing through
December 1996 totaling $53,490.
The following summarizes the post-exchange rate after-tax contribution to
Rayonier's net income from New Zealand operating income and related foreign
exchange effects (millions of dollars):
1995 1994 1993
---- ---- ----
OPERATING INCOME ON A 1993 EXCHANGE RATE BASIS $ 18 $ 14 $ 27
Effect of exchange rate changes since 1993 (5) (2) -
---- ---- ----
OPERATING INCOME AS REPORTED 13 12 27
Non-operating gain from foreign exchange contracts 1 - -
Income taxes at statutory rates (5) (4) (9)
After-tax effect of exchange rate changes on taxable income 2 2 -
---- ---- ----
POST-EXCHANGE RATE AFTER-TAX CONTRIBUTION
FROM OPERATING INCOME $ 11 $ 10 $ 18
===== ==== ====
After-tax contribution of constant exchange rate
operating income at statutory rates $ 12 $ 9 $ 18
===== ==== ====
The Company believes that it has been able to mitigate most of the effect of
exchange rate fluctuations of the New Zealand dollar through risk management
activities, thereby normalizing the net income contribution of its New Zealand
operations on a post-exchange rate basis toward what it would have been without
exchange rate movements. The Company plans to continue this program but will
continue to limit its mark to market exposure so as not to have a material
effect on EPS if exchange rates move rapidly.
19. QUARTERLY RESULTS FOR 1995 AND 1994 (UNAUDITED)
(thousands of dollars, except per share amounts)
Quarter Ended
------------------------------------------ Total
March 31 June 30 Sept. 30 Dec. 31 Year
-------- ------- -------- ------- -----
1995
Sales $285,832 $313,564 $333,913 $327,183 $1,260,492
======== ======== ======== ======== ==========
Operating income $ 54,844 $ 53,691 $ 61,357 $ 63,785 $ 233,677
======== ======== ======== ======== ==========
Net income $ 25,149 $ 26,338 $ 57,038* $ 33,823 $ 142,348
======== ======== ======== ======== ==========
Earnings per Common Share $ .84 $ .88 $ 1.90* $ 1.13 $ 4.75
======== ======== ======== ======== ==========
1994
Sales $257,727 $250,770 $286,006 $274,991 $1,069,494
======== ======== ======== ======== ==========
Operating income $ 51,172 $ 35,231 $ 40,075 $ 42,869 $ 169,347
======== ======== ======== ======== ==========
Net income $ 21,719 $ 14,114 $ 16,405 $ 17,794 $ 70,032
======== ======== ======== ======== ==========
Earnings per Common Share $ .73 $ .48 $ .55 $ .60 $ 2.36
======== ======== ======== ======== ==========
*Includes a non-recurring pretax gain of $34,763, $23,946 after-tax, or $0.80
per Common Share. See Note 3.
F-19
41
SIGNATURES
Pursuant to the requirements of Section 13 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.
By KENNETH P. JANETTE
---------------------------------------
Kenneth P. Janette
March 26, 1996 Vice President and Corporate Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------- ----- ----
* Chairman of the Board,
- -------------------------------- President, Chief Executive
Ronald M. Gross Officer and Director
(Principal Executive Officer)
GERALD J. POLLACK Senior Vice President and March 26, 1996
- -------------------------------- Chief Financial Officer
Gerald J. Pollack
(Principal Financial Officer)
KENNETH P. JANETTE Vice President and March 26, 1996
- -------------------------------- Corporate Controller
Kenneth P. Janette
(Principal Accounting Officer)
* Director
- --------------------------------
William J. Alley
* Director
- --------------------------------
Rand V. Araskog
* Director
- --------------------------------
Donald W. Griffin
* Director
- --------------------------------
Paul G. Kirk, Jr.
* Director
- --------------------------------
Katherine D. Ortega
* Director
- --------------------------------
Burnell R. Roberts
* Director
- --------------------------------
Nicholas L. Trivisonno
* Director
- --------------------------------
Gordon I. Ulmer
*By GERALD J. POLLACK March 26, 1996
- --------------------------------
Attorney-In-Fact
A
42
EXHIBIT INDEX
Exhibit No. Description Location
- ----------- ----------- --------
2.1 Distribution agreement between Incorporated by reference to Exhibit 2.1 to
ITT Corporation and Rayonier Inc. the Registrant's December 31, 1993 Form 10-K
3.1 Amended and Restated Articles of Incorporated by reference to Exhibit 4(a)
Incorporation to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-52437)
3.2 By-Laws Filed herewith
4.1 Indenture dated as of September 1, 1992 Incorporated by reference to Exhibit 4.1 to
between the Company and Bankers the Registrant's December 31, 1993 Form 10-K
Trust Company, as Trustee, with respect
to certain debt securities of the Company
4.2 First Supplemental Indenture dated as of Incorporated by reference to Exhibit 4.2 to
December 13, 1993 the Registrant's December 31, 1993 Form 10-K
4.3 $100 million 364-day Revolving Credit Incorporated by reference to Exhibit 4.1 to
Agreement dated as of April 14, 1995 among the Registrant's March 31, 1995 Form 10-Q
Rayonier Inc. as Borrower and the banks named
therein as Banks, Citibank, N.A. as Administrative
Agent and Citicorp Securities, Inc. and the
Toronto-Dominion Bank as Arrangers
4.4 $200 million Revolving Credit Agreement Incorporated by reference to Exhibit 4.2 to
dated as of April 14, 1995 among Rayonier the Registrant's March 31, 1995 Form 10-Q
Inc. as Borrower and the banks named therein
as Banks, Citibank, N.A. as Administrative
Agent and Citicorp Securities, Inc. and the
Toronto-Dominion Bank as Arrangers
4.5 Other instruments defining the rights Not required to be filed. The Registrant
of security holders, including indentures hereby agrees to file with the Commission a
copy of any other instrument defining the
rights of holders of the Registrant's long-term
debt upon request of the Commission
9 Voting trust agreement None
10.1 Administrative Services Agreement Incorporated by reference to Exhibit 10.1 to
between ITT Corporation and Rayonier Inc. the Registrant's December 31, 1993 Form 10-K
10.2 Employee Benefits Agreement between Incorporated by reference to Exhibit 10.2 to
ITT Corporation and Rayonier Inc. the Registrant's December 31, 1993 Form 10-K
10.3 Tax Allocation Agreement between Incorporated by reference to Exhibit 10.3 to
ITT Corporation and Rayonier Inc. the Registrant's December 31, 1993 Form 10-K
10.4 Canadian Assets Purchase Agreement Incorporated by reference to Exhibit 10.4 to
between ITT Corporation and Rayonier Inc. the Registrant's December 31, 1993 Form 10-K
B
43
EXHIBIT INDEX
-------------
Exhibit No. Description Location
- ------------ ----------- --------
10.5 Rayonier 1994 Incentive Stock Plan Incorporated by reference to Exhibit 4(c) to
the Registrant's Registration Statement on
Form S-8 (File No. 33-52445)
10.6 Rayonier Senior Executive Severance Incorporated by reference to Exhibit 10.6
Pay Plan to the Registrant's Registration Statement
on Form 8-A dated December 15, 1993
(the Form 8-A)
10.7 Rayonier Investment and Savings Plan Incorporated by reference to Exhibit 4(c) to
for Salaried Employees the Registrant's Registration Statement on
Form S-8 (File No. 33-52437)
10.8 Supplement to Rayonier Investment Incorporated by reference to Exhibit 4.6 to
and Savings Plan for Salaried Employees the Registrant's Registration Statement on
including the First, Second, Third, Fourth Form S-8 (File No. 33-65291)
and Fifth Amendments to the Rayonier
Investment and Savings Plan for Salaried
Employees
10.9 Rayonier Salaried Employees Incorporated by reference to Exhibit 10.8
Retirement Plan to the Form 8-A
10.10 Form of Indemnification Agreement Incorporated by reference to Exhibit 10.9 to
between Rayonier Inc. and its the Registrant's December 31, 1993 Form 10-K
Directors and Officers
10.11 Rayonier Inc. Excess Benefit Plan Incorporated by reference to Exhibit 10.10 to
the Registrant's December 31, 1993 Form 10-K
10.12 Rayonier Inc. Excess Savings and Filed herewith
Deferred Compensation Plan
10.13 Form of Rayonier Inc. Excess Savings Filed herewith
and Deferred Compensation Plan
Agreements
10.14 Form of Indemnification Agreement Incorporated by reference to Exhibit 10.1 to the
between Registrant and directors of Registrant's March 31, 1994 Form 10-Q
Rayonier Forest Resources Company, its wholly owned
subsidiary which is Managing General
Partner of Rayonier Timberlands, L.P., who are not
also directors of Registrant
10.15 Description of Rayonier 1994 Incentive Stock Incorporated by reference to Exhibit 10.1 to the
Plan Contingent Performance Share Awards Registrant's June 30, 1994 Form 10-Q
10.16 Form of Rayonier 1994 Incentive Stock Plan Incorporated by reference to Exhibit 10.1 to the
Contingent Performance Share Award Agreement Registrant's June 30, 1994 Form 10-Q
C
44
EXHIBIT INDEX
-------------
Exhibit No. Description Location
- ------------ ----------- --------
10.17 Form of Rayonier 1994 Incentive Stock Filed herewith
Plan Restricted Share Award Agreement
10.18 Form of Rayonier 1994 Incentive Stock Filed herewith
Non-qualified Stock Option Award Agreement
10.19 Rayonier Substitute Stock Option Plan Incorporated by reference to Exhibit 4(c) to
the Registrant's Registration Statement on
Form S-8 (File No. 33-52891)
10.20 Form of Rayonier Substitute Stock Filed herewith
Option Award Agreements
10.21 Split-Dollar Life Insurance Agreement dated Incorporated by reference to Exhibit 10.2 to the
June 22, 1994 between Rayonier Inc. and Registrant's June 30, 1994 Form 10-Q
Ronald M. Gross
10.22 Deferred Compensation/Supplemental Incorporated by reference to Exhibit 10.3 to the
Retirement Agreement dated June 28, 1994 Registrant's June 30, 1994 Form 10-Q
between Rayonier Inc. and Ronald M. Gross
10.23 Other material contracts None
11 Statement re computation of per share Not required to be filed
earnings
12 Statements re computation of ratios Filed herewith
13 Annual report to security holders, Form 10-Q Not applicable
or quarterly report to security holders
16 Letter re change in certifying accountant Not applicable
18 Letter re change in accounting principles Not applicable
21 Subsidiaries of the Registrant Incorporated by reference to Exhibit 21 to
the Registrant's December 31, 1993 Form 10-K
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel Filed herewith
24 Powers of attorney Filed herewith
27 Financial data schedule Filed herewith
28 Information from reports furnished to Not applicable
state insurance regulatory authorities
99 Additional exhibits None
D