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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
For the year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............ to ............
COMMISSION FILE NUMBER 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
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 1998-1999
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 10, 1998, was approximately
$1,293,000,000.
As of March 10, 1998, there were outstanding 28,303,555 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 15, 1998, is incorporated by reference in
Part III of the Form 10-K.
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TABLE OF CONTENTS
ITEM PAGE
PART 1
1. Business 1
2. Properties 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
* Executive Officers of Rayonier 7
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
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 17
* 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, 1997 F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996 F-3 to F-4
Statements of Consolidated Cash Flows for the
Three Years Ended December 31, 1997 F-5
Notes to Consolidated Financial Statements F-6 to F-18
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 E
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PART I
ITEM 1. BUSINESS
GENERAL
Rayonier Inc. (Rayonier or the Company), including its subsidiaries, is a
leading international forest products company primarily engaged in the trading,
merchandising and manufacturing of logs, timber and wood products, and in the
production and sale of high-value-added specialty pulps. Rayonier owns, leases,
manages or controls approximately 1.5 million acres of timberland in the United
States and New Zealand. In addition, the Company operates two pulp mills and
three lumber manufacturing facilities in the United States and, as of October 1,
1997, a medium density fiberboard plant in New Zealand.
Rayonier was founded as Rainier Pulp and Paper Company in Shelton, WA in 1926.
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), then 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 executive offices at 1177
Summer Street, Stamford, CT 06905-5529. Its telephone number is (203) 348-7000.
Rayonier operates in two major business segments, Timber and Wood Products and
Specialty Pulp Products. In 1997, Timber and Wood Products accounted for 50
percent of sales and Specialty Pulp Products accounted for 47 percent of sales.
The remaining 3 percent of sales (classified in Dispositions) were made from
inventory of the Company's Port Angeles, WA, pulp mill, which was closed on
February 28, 1997. With customers in 70 countries, 49 percent of Rayonier's 1997
sales of $1.104 billion were made to customers outside of the United States. 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 15 - 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) Trading and merchandising, (2) Timberlands
management and (3) Wood products. Sales for the last three years by principal
line of business were as follows (in millions of dollars):
Sales Revenue
----------------------------------------------------------
1997 % 1996 % 1995 %
---- - ---- - ---- -
Trading and merchandising $ 259 47 $ 322 55 $ 393 64
Timberlands management 184 33 196 34 168 27
Wood products 133 24 104 18 75 12
Intrasegment eliminations (23) (4) (40) (7) (18) (3)
---- ---- ---- ---- ---- ----
Total $ 553 100 $ 582 100 $ 618 100
==== === ==== === ==== ===
TRADING AND MERCHANDISING
Rayonier is a leading exporter and trader of softwood logs, lumber and wood
panel products. Rayonier purchases and harvests timber and purchases lumber and
wood panel products for sale in domestic and export markets. In 1997, 53 percent
of New Zealand log sales volume was sourced from Company timberlands. In North
America, 6 percent of log sales volume was sourced from Rayonier's timberlands;
however, logs also were purchased from local dealers who had, in some cases,
purchased their cutting rights from Company-managed timberlands.
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TIMBERLANDS MANAGEMENT
Rayonier manages approximately 1.5 million acres of timberlands as of December
31, 1997 as follows in (000's):
Fee Long-Term
Region Total Acres % Owned Acres Leased Acres
------ ----------- - ----------- ------------
Southeast U.S. 854 59 744 110
Northwest U.S. 379 26 379 -
New Zealand 219 15 6 213
----- ------ ----- ---
Total 1,452 100 1,129 323
===== === ===== ===
Rayonier manages timberlands, scientifically developing forests until their
economic peak for specific markets. The average rotation age for timber from the
Southeastern U.S. (primarily Southern pine) is 25 years for timber sold to
sawmills and 20 years for pulpwood destined for pulp and paper mills. The
average rotation age for timber destined for domestic and export markets from
the Northwestern U.S. (primarily hemlock and Douglas fir species) is 45-50
years. The average rotation age for timber grown in New Zealand (primarily
radiata pine) is 25-28 years.
Timberlands Management is organized to regularly sell timber through auction
processes predominately to third parties. By requiring the Company's other
business sectors (e.g., Specialty Pulp Products, Wood Products and Trading and
Merchandising) to competitively bid on the timber, the Company believes it can
maximize the true economic return on its investments.
The Company manages its timberlands on a sustainable yield basis in conformity
with best forest industry practices. A key to success is the extensive
application of Rayonier's silvicultural expertise to species selection for
plantations, soil preparation, thinning of timber stands, pruning of selected
species, fertilization and careful timing of the harvest, all designed to
maximize value, while responding to environmental needs.
The following table sets forth Timberlands Management acres by region and by
timber classification in (000's):
Softwood Hardwood
Region Plantation Lands Non-Forest Total
------ ---------- ----- ---------- -----
Southeast U.S. 558 293 3 854
Northwest U.S. 323 18 38 379
New Zealand (1) 214 5 - 219
----- ------ ---- ------
Total 1,095 316 41 1,452
===== ====== ==== ======
(1) Excludes 30 thousand acres managed by Rayonier under joint ventures and
approximately 67 thousand acres of native bush estate that is not
harvestable.
The following table sets forth the estimated volumes of merchantable timber by
location and type, as of December 31, 1997.
Equivalent total,
in thousands
Region Softwood Hardwood Total of cubic meters %
- ------ -------- -------- ----- --------------- -
Southeast U.S., in thousands of short green tons 9,683 6,856 16,539 11,316 27
Northwest U.S., in millions of board feet 2,096 213 2,309 13,961 34
New Zealand, in thousands of cubic meters 15,634 220 15,854 15,854 39
------ --
41,131 100
====== ===
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Merchantable timber inventory is an estimate of the amount of standing timber at
the earliest age that, under varying economic conditions, could be harvested.
Estimates are based on a continuing inventory system, which involves periodic
statistical sampling of the timberlands, with adjustments made on the basis of
growth estimates, harvest information and market conditions.
Southeastern U.S. timberlands are located primarily in Georgia and Florida.
Their proximity to pulp, paper and lumber mills results in significant
competition for the purchase of Rayonier's timber. Approximately 55 percent of
the timber harvest is pulpwood, which is destined for pulp and paper mills, with
the remaining 45 percent representing higher value timber sold primarily to
plywood and lumber mills. 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 2-3 percent per year and expects this trend to continue.
Northwestern U.S. 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 softwood stands, of which
approximately 71 percent is hemlock and 29 percent is Douglas fir, Western red
cedar and spruce, and hardwood timber stands, consisting principally of alder
and maple.
New Zealand forest assets consist primarily of Crown Forest licenses providing
the right to utilize approximately 219,000 acres of New Zealand plantation
forests for a minimum period of 35 years. Approximately 91 percent of these
timberlands consist of radiata pine trees, well suited for high quality lumber
and panel products. The trees typically produce up to twice as much fiber per
acre, per year as the most productive commercial tree species in the United
States. The remaining 9 percent is Douglas fir and other species. Rayonier grows
New Zealand timber for both domestic New Zealand uses and for export primarily
to the Pacific Rim markets. In addition, Rayonier New Zealand manages
timberlands for others, principally joint ventures in which Rayonier holds a
minority interest.
WOOD PRODUCTS
Rayonier's lumber mills located at Baxley and Swainsboro, GA, convert Southern
pine timber into dimension and specialty lumber products for residential
construction and industrial uses. The two mills have a combined annual capacity
of approximately 250 million board feet of lumber and approximately 528,000 tons
of wood chips for pulping. The mills sell their lumber output primarily in
Southeastern United States and Caribbean markets. Substantially all of the wood
chip production is sold (at market price) to Rayonier's Jesup, GA pulp facility
accounting for approximately 28 percent of Jesup's 1997 pine chip consumption. A
third lumber manufacturing facility, located in Plummer, ID, has annual capacity
of 85 million board feet. Lumber is sold primarily by Rayonier sales personnel,
although sales to certain export locations are made through independent sales
agents.
In the third quarter of 1997, the Company completed construction of a $115
million medium-density-fiberboard (MDF) facility in New Zealand with an annual
capacity of 140,000 cubic meters and utilities infrastructure capacity for an
additional 140,000 cubic meters. The Company markets its MDF in New Zealand
through an exclusive marketing arrangement with a third party. Internationally,
the Company's premium grade Patinna(TM) brand MDF is marketed by Rayonier
personnel and independent sales agents.
SPECIALTY PULP PRODUCTS
Rayonier is a leading specialty pulp manufacturer. The Company owns and operates
pulp mills at Jesup, GA, and Fernandina Beach, FL, with an annual capacity of
700,000 metric tons. Rayonier's facilities are able to manufacture more than 25
different grades of pulp to meet customers' needs. The Jesup facility produces
approximately 550,000 metric tons of wood pulp, or 79 percent of Rayonier's
total capacity. The Fernandina Beach facility produces approximately 150,000
metric tons of wood pulp, or 21 percent of Rayonier's total capacity.
Sales for the last three years for the Jesup and Fernandina Beach mills by
principal line of business were as follows (millions of dollars):
Sales Revenue
---------------------------------------------------
1997 % 1996 % 1995 %
---- - ----- - ---- -
Chemical cellulose $ 338 65 $ 328 64 $ 288 53
Fluff and specialty paper pulps 182 35 186 36 252 47
--- -- --- -- --- --
Total $ 520 100 $ 514 100 $ 540 100
===== === ==== === ==== ===
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Rayonier concentrates on the production of specialty pulps to customers'
specifications, sold to industrial companies producing a wide variety of
products. Over half of Rayonier's pulp sales are to export customers, primarily
in Europe, Asia and Latin America. 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 through independent sales agents.
CHEMICAL CELLULOSE
Rayonier is one of the world's leading producers of chemical cellulose, also
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. 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 where it is a leading supplier.
FLUFF AND SPECIALTY PAPER PULPS
Rayonier is a leading supplier of fluff pulp, used as an absorbent medium in
products such as disposable baby diapers, personal sanitary napkins,
incontinence pads, convalescent bed pads, industrial towels and wipes and
non-woven fabrics.
Rayonier also is a major producer of specialty paper pulps and produces only a
small volume of regular paper pulp. Customers use Rayonier's specialty paper
pulps to manufacture paper for decorative laminates for counter tops, air and
oil filters, shoe innersoles, battery separators, circuit boards and filter
media for the food industry. Paper pulp, representing approximately 2 percent of
total Company pulp sales, is used in the manufacture of bond, book and printing
paper.
PULP PRICING
Pulp prices are cyclical. Since Rayonier is a non-integrated specialty pulp
producer for non-paper making end uses, pricing of its high-value product mix
tends to lag (on both the upturn and downturn) commodity paper pulp prices.
FOREIGN SALES AND OPERATIONS
Rayonier's sales for the last three years by point of destination are as follows
(millions of dollars):
Sales by Destination
---------------------------------------------------------
1997 % 1996 % 1995 %
---- - ---- - ---- -
United States $ 568 51 $ 527 45 $ 518 41
Europe 127 12 135 12 141 12
Japan 173 16 234 20 269 21
Korea 52 5 49 4 77 6
China 36 3 54 4 60 5
Other Asia 66 6 89 7 76 6
Latin America 59 5 57 5 64 5
Canada 16 1 20 2 42 3
All other 7 1 13 1 13 1
------------- ------------ ------ ------
Total $ 1,104 100 $ 1,178 100 $1,260 100
====== === ====== === ===== ===
Overseas assets, primarily in New Zealand, were 22 percent of total assets at
the end of 1997 and Rayonier's sales from non-U.S. sources were 10 percent of
total sales.
See Note 15 - Segment Information of the Notes to Consolidated Financial
Statements.
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DISPOSITIONS AND DISCONTINUED OPERATIONS
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill, which was closed on February 28, 1997, its interest in the Grays
Harbor, WA, pulp and paper complex, which was closed in 1992, its wholly owned
subsidiary, Southern Wood Piedmont Company (SWP), which ceased operations in
1986, and other miscellaneous assets held for disposition.
See Note 6 - Reserves for Dispositions and Discontinued Operations of the Notes
to Consolidated Financial Statements.
RAYONIER TIMBERLANDS, L.P.
In the United States, Rayonier manages almost all of its timberlands and sells
timber directly through Rayonier Timberlands, L.P. (RTLP), a limited
partnership. Rayonier and its wholly owned subsidiary, Rayonier Forest Resources
Company (RFR), are the general partners of RTLP. Until January 1998, Rayonier
owned 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 through December 31, 2000, are allocated 95
percent to all Class A Units. In January 1998, the publicly held units were
acquired by Rayonier under the terms of the RTLP Partnership Agreement. See Note
3 Subsequent Event (Rayonier Timberlands, L.P.) of the Notes to Consolidated
Financial Statements.
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
Rayonier's patents are of significant importance to the operation of each of its
individual businesses, 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 overall.
COMPETITION AND CUSTOMERS
The Company's U.S. timberlands are located in two major timber growing regions
(the Southeast and the Northwest), where timber markets are fragmented and very
competitive. In the Northwest U.S., John Hancock Mutual Life Insurance Co. and
Washington state (DNR) are significant competitors. 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.
Rayonier's lumber and MDF wood products compete with the products of numerous
companies, some of which are larger and have greater resources than Rayonier.
Both lumber and MDF compete with alternative construction materials. In most of
Rayonier's markets, competition is primarily through price, quality, customer
relationships and technical service.
Export log markets are highly competitive, with logs available from several
countries and numerous suppliers. In New Zealand, major competitors include
Carter Holt Harvey and Fletcher Challenge. In North America, Weyerhaeuser,
International Paper and Willamette are principal competitors. Price and customer
relationships are important methods of competition.
Specialty pulp products are marketed worldwide against strong competition from
domestic and foreign producers. Rayonier's major competitors include
International Paper, Weyerhaeuser, Georgia-Pacific, Buckeye Technologies and
Stora Kopparberg. Product performance, pricing and technical service are the
principal methods of competition.
ENVIRONMENTAL MATTERS
See "Environmental Regulation" in Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 14 - Contingencies 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 and is also subject
to cyclical swings in lumber and paper and pulp markets. While the Timberlands
Management business has benefited from a significant increase in timber prices
over the last decade, this increase also adversely impacted fiber costs at
Rayonier's pulp and lumber manufacturing facilities.
- 5 -
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Rayonier has pursued, and is continuing to pursue, reductions in usage and costs
of key raw materials, supplies and contract services at the Company's pulp and
lumber mills. Management foresees no significant constraints from pricing or
availability of its key raw materials.
RESEARCH AND DEVELOPMENT
Rayonier believes it maintains one of the preeminent specialty pulp research
facilities and staff in the forest products industry. 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. The research center
is adjacent to the pulp mill in Jesup, GA.
Research activities related to Timberlands Management operations include genetic
tree improvement programs as well as applied silviculture programs to identify
management practices that improve returns from timberland assets.
Research and development expenditures were $10 million, $11 million, and $8
million in 1997, 1996 and 1995, respectively.
EMPLOYEE RELATIONS
Rayonier currently employs approximately 2,500 people. Of this number,
approximately 2,250 are employees in the United States, of whom 44 percent are
covered by labor contracts. Most hourly employees are represented by one of
several labor unions. Labor relations are maintained in a normal and
satisfactory manner.
The Jesup labor agreements, covering approximately 700 employees, expire in June
2002. Fernandina labor contracts, covering approximately 300 employees, expire
in May 2001.
Rayonier has in effect various plans for its employees and retirees, providing
certain group medical, dental and life insurance coverage, pension and other
benefits. The cost is borne primarily by Rayonier.
ITEM 2. PROPERTIES
RTLP owns, leases or controls approximately 1.1 million acres of timberlands in
the United States previously owned or leased by Rayonier. See Note 3 -
Subsequent Event (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 these
properties and sell timber to Rayonier as well as unaffiliated parties.
Rayonier's New Zealand subsidiary owns or manages the forest assets on
approximately 219,000 acres of plantation forests in New Zealand. Rayonier and
its wholly owned subsidiaries own or lease various other properties used in
their operations, which include two pulp mills, three lumber manufacturing
facilities, an MDF plant, a research facility, various other timberlands and
Rayonier's corporate headquarters. These facilities (except for the corporate
headquarters in Stamford, CT) are located in the Northwestern and Southeastern
portions of the United States and in New Zealand.
ITEM 3. LEGAL PROCEEDINGS
Rayonier is one of two defendants in an action by Powel-Duffryn Terminals
instituted in the U.S. District Court for the Southern District of Georgia on
April 10, 1997, seeking indemnity for $57 million in damages incurred as the
result of a fire and explosion at a marine terminal and storage facility where
crude sulfate turpentine produced by Rayonier and others was stored. Plaintiff
has sued to recover sums paid to third party claimants, expenses incurred to
remediate the property and adjoining lands and other damages. Rayonier is
vigorously defending the action, believes that its defenses are meritorious and
based on advice of counsel, believes that its liability, if any, will not be
material and will be covered by its product liability insurance. See also Note
14 - Contingencies (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 1997.
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EXECUTIVE OFFICERS OF RAYONIER
RONALD M. GROSS, 64, Chairman of the Board and Chief Executive Officer - He
joined Rayonier in March 1978 as President and Chief Operating Officer and a
director, was elected Chief Executive Officer in 1981 and Chairman in 1984; he
assumed his present position in July 1996. He also serves as 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.
W. LEE NUTTER, 54, President and Chief Operating Officer - He was elected to his
current position on July 19, 1996, and was elected a director of Rayonier on the
same date. He joined Rayonier in 1967 in the Northwest Forest Operations and was
named Vice President, Timber and Wood in 1984, Vice President, Forest Products
in 1985, Senior Vice President, Operations, in 1986 and Executive Vice President
in 1987. 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.
WILLIAM S. BERRY, 56, Executive Vice President, Forest Resources and Corporate
Development - He was elected to his present position in October 1996 after being
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
holds a B.S. in Forestry from the University of California at Berkeley and an
M.S. in Forestry from the University of Michigan.
WILLIAM A. KINDLER, 55, Senior Vice President, Specialty Pulp - He was elected
to his present position effective March 1, 1998. He joined Rayonier in August
1996 and was elected Vice President Specialty Pulp, in October 1996. Prior to
coming to Rayonier, Mr. Kindler was with James River Corporation for 26 years
where he held a number of senior management positions, most recently as Vice
President, General Manager, Printing Papers (November 1988 until March 1994) and
as Vice President, Product Supply, Consumer Products (March 1994 until August
1996). He holds a B.A. in Chemistry from Western Washington University and an
M.S. and Ph.D. in Pulp and Paper Technology from the Institute of Paper
Chemistry.
JOHN P. O'GRADY, 52, 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
and its subsidiaries. Mr. O'Grady serves on the employee and labor relations
committee of the American Forest & Paper Association (AFPA). He is on the
Business Advisory Board of the University of Oklahoma School of Business and is
a Management Trustee for United Paperworkers' Health and Welfare Trust. Mr.
O'Grady 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.
GERALD J. POLLACK, 56, 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 is a member of the New York Advisory Board of the Allendale
Insurance Co., the financial management committee of AFPA, and the Financial
Executives 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 College.
CHARLES MARGIOTTA, 45, Vice President, Forest and Wood Products - He was elected
to his present position effective January 1, 1997. He joined Rayonier in 1976
and following assignments at its corporate headquarters and its Southeast Forest
Resources division, went to Rayonier's New Zealand operations in 1989 where he
served as General Manager, Rayonier New Zealand, until 1992 when he was promoted
to Managing Director, Rayonier New Zealand. He holds a B.B.A. in Accounting and
Finance from Pace University, has attended the Duke University Senior
Professional Forestry Program and has recently completed the International
Advanced Management Program at the Harvard Graduate School of Business
Administration.
KENNETH P. JANETTE, 52, Vice President and Corporate Controller - He joined
Rayonier in August 1994 and was elected Vice President and Corporate Controller
in October 1994. From 1992 to 1994 he was Vice President and Corporate
Controller of Sunkyong America, Inc., a Korean international trading
organization, which he joined in 1990 as Corporate Controller. He was with AMAX
Inc. from 1977 to 1990, most recently as Assistant Corporate Controller and
Director of Auditing, and was with Arthur Andersen and Co. from 1968 to 1977. He
is a member of the Financial Executives Institute, the AICPA and the Institute
of Management Accountants. He received a B.S. in Accounting in 1967 and an
M.B.A. in Finance in 1968 from the University of Rochester.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The table below 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.
RAYONIER COMMON SHARES - MARKET PRICES AND DIVIDENDS (UNAUDITED)
Composite
High Low Volume Dividend
---- --- ------ --------
1997
----
First Quarter $ 39.13 $ 35.25 3,611,800 $.30
Second Quarter 44.38 36.88 3,391,800 .30
Third Quarter 53.00 42.00 3,657,700 .30
Fourth Quarter 51.13 40.25 3,655,100 .30
1996
----
First Quarter $37.25 $ 33.13 5,692,000 $.29
Second Quarter 38.63 35.00 5,965,700 .29
Third Quarter 41.25 37.75 4,006,600 .29
Fourth Quarter 40.00 37.38 5,163,000 .29
On February 20, 1998, Rayonier announced a one cent increase in its quarterly
dividend. The first quarter dividend of 31 cents per share is payable on March
31, 1998 to shareholders of record on March 10, 1998.
There were approximately 25,099 holders of record of Rayonier Common Shares on
February 27, 1998.
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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, 1997 is 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
---------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
OPERATIONS:
Sales $ 1,104 $ 1,178 $ 1,260 $1,069 $ 936
Operating income before provision for
dispositions 166 159 234 169 130
Provision for dispositions - (125)(1) - - (3)
Operating income 166 34 234 169 127
Income (loss) from continuing operations 87 ( - ) 142 70 52
Provision for discontinued operations - (98)(2) - - -
Net income (loss) 87 (98) 142 70 52
PER COMMON SHARE:
Income (loss) from continuing operations $ 2.97 $ ( - ) $ 4.75 $ 2.36 $ 1.77
Provision for discontinued operations - (3.28) - - -
Net income (loss) - Diluted 2.97 (3.28) 4.75 2.36 1.77
- Basic 3.03 (3.28) 4.81 2.37 1.77
Dividends paid 1.20 1.16 1.00 .72 4.12(3)
Book value 22.37 21.29 25.95 22.15 20.51
FINANCIAL CONDITION:
Total assets $ 1,596 $ 1,598 $ 1,648 $1,524 $1,488
Total debt 426 433 450 483 498
Book value 633 623 769 655 606
CASH FLOW:
Cash flow from operating activities $ 253 $ 236 $ 213 $ 190 $ 118
Capital expenditures 137 187 143 101 72
Custodial capital spending 72 83 72 67 65
Depreciation, depletion and amortization 99 97 96 90 78
EBITDA (4) 237 236 303 229 187
EBIT (5) 138 139 207 139 109
Free cash flow (6) 122 119 107 90 36
Dividends 35 34 30 21 122(3)
PERFORMANCE RATIOS (%):
Operating income to sales (7) 15 13 19 16 14
Return on equity (8) 14 - 20 11 8
Return on assets (8) 5 - 9 5 4
Debt to capital 40 41 37 43 45
OTHER:
Number of employees 2,500 2,700 2,900 2,700 2,600
Timberlands, thousands of acres 1,452 1,462 1,473 1,501 1,495
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Year Ended December 31
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED OPERATING DATA (UNAUDITED)
Timber and Wood Products
Trading volume
North America logs - in millions of board feet 224 284 351 306 266
New Zealand logs- in thousands of cubic meters 1,113 1,414 1,682 1,623 1,375
Other logs - in thousands of cubic meters 277 97 103 54 67
Timber sales volume
Northwest U.S. - in millions of board feet 190 193 175 194 143
Southeast U.S. - in thousands of short green tons 2,421 2,281 2,218 2,184 2,001
New Zealand - in thousands of cubic meters (9) 1,111 1,097 - - -
Lumber sales volume - in millions of board feet 325 280 213 197 125
Intercompany sales volume
Logs - in millions of board feet 1 12 22 13 15
NW U.S. timber - in millions of board feet 14 23 32 36 28
SE U.S. timber - in thousands of short green tons 92 158 292 199 299
New Zealand timber - in thousands of cubic meters (9) 589 840 - - -
Specialty Pulp Products
Pulp sales volume
Chemical cellulose - in thousands of metric tons (10) 381 349 342 311 275
Fluff and specialty paper pulp - in thousands of metric
tons (11) 344 332 308 350 330
Production as a percent of capacity 100% 101% 99% 96% 88%
(1) Includes a charge of $125 million ($79 million after-tax) related to the
closure of the Port Angeles pulp mill and write-off of other
non-strategic assets.
(2) Includes an after-tax charge to implement AICPA Statement of Position
96-1 related to future environmental monitoring costs.
(3) Includes a $90 million ($3.04 per Common Share) special dividend paid to
ITT.
(4) EBITDA is defined as earnings from continuing operations before
significant non-recurring items, provision for dispositions, interest
expense, income taxes and depreciation, depletion and amortization.
(5) EBIT is defined as earnings from continuing operations before significant
non-recurring items, provision for dispositions, interest expense and
income taxes.
(6) 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.
(7) Based on operating income before provision for dispositions.
(8) Based on income (loss) from continuing operations, including charges for
pulp mill disposition.
(9) Intercompany activity began in 1996 when Rayonier divided its New Zealand
operations into separate trading and timberlands management
organizations. Timber harvested and sold as logs was 1,133, 1,155 and 918
for the years 1995-1993, respectively.
(10) Excludes sales by the Port Angeles pulp mill, which ceased operations on
February 28, 1997, of 35, 94, 98, 117, and 94 for the years 1997-1993,
respectively.
(11) Excludes sales by the Port Angeles pulp mill of 7, 18, 36, 12, and 22 for
the years 1997-1993, respectively.
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14
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, 1997 were as follows (in millions of dollars):
Year Ended December 31
---------------------------------------
SALES 1997 1996 1995
- ----- ---- ---- ----
TIMBER AND WOOD PRODUCTS
Trading and merchandising $ 259 $ 322 $ 393
Timberlands management 184 196 168
Wood products 133 104 75
Intrasegment eliminations (23) (40) (18)
------ ----- ------
Total Timber and Wood Products 553 582 618
------ ----- ------
SPECIALTY PULP PRODUCTS
Chemical cellulose 338 328 288
Fluff and specialty paper pulps 182 186 252
------ --- ------
Total Specialty Pulp Products 520 514 540
------ --- ------
Intersegment eliminations (3) (6) (20)
------ ----- ------
Total before dispositions 1,070 1,090 1,138
Dispositions 34 88 122
------ ----- ------
Total sales $ 1,104 $1,178 $ 1,260
====== ===== ======
OPERATING INCOME
Timber and Wood Products $ 124 $ 127 $ 141
Specialty Pulp Products 56 57 103
Corporate and other (17) (16) (12)
------ ------ ------
Total before dispositions 163 168 232
Dispositions 3 (134) 2
------ ----- ------
Total operating income $ 166 $ 34 $ 234
====== ===== ======
BUSINESS CONDITIONS
Rayonier's 1997 net income was $87 million, or $2.97 per share, compared to 1996
net income, excluding significant non-recurring items, of $79 million, or $2.63
per share. The 1997 results include a non-operating gain of $8 million ($6
million after-tax, or 19 cents per share) related to the sale of an interest in
New Zealand timber assets. The improved 1997 results also reflect the absence of
losses from the now-closed Port Angeles pulp mill, stronger lumber markets,
lower minority interest, lower interest expense and a lower effective tax rate.
Rayonier's overall operating results are somewhat cyclical and driven by
international economic factors. In 1997, approximately 49 percent of Rayonier
sales were made to customers outside the U.S., down from 55 percent in 1996.
Lower export sales following closure of the Port Angeles pulp mill on February
28, 1997, contributed to the reduction. In addition, weak Asian economies,
together with a strengthening U.S. dollar, further reduced sales prices and
volume on timber and log sales from the Northwest U.S. and New Zealand.
Relatively high worldwide market pulp inventories during most of 1997 resulted
in lower average pulp prices than in 1996.
In January 1998, the Company acquired the outstanding publicly traded minority
interest in Rayonier Timberlands, L.P. (RTLP or the Partnership), a master
limited partnership that owned and operated most of its U.S. timberlands
business. As a
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15
result of the acquisition, Rayonier expects to recognize approximately 25 cents
to 30 cents per share of incremental net income in 1998 based on its current
perception of markets for timber harvested from the Partnership's timberlands.
A strategic assessment of the Company's specialty pulp business was completed
early in 1997. Actions are underway to implement several significant profit
improvement opportunities that were identified. Pulp production costs declined
in 1997 as operating efficiency improved and certain key raw material and
service costs fell. These general trends are expected to continue during 1998.
Rayonier's capital spending in 1997 and 1996 was focused on expansion of its New
Zealand operations, quality and productivity improvements in Specialty Pulp
Products and acquisitions and growth in the Timber and Wood Products businesses.
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.
During the fourth quarter of 1997 and early 1998, weakness in Asian markets
placed additional price pressure on worldwide pulp markets, as well as timber
and log markets in New Zealand and the Northwest U.S. Partially offsetting these
effects are lower costs for many of the Company's raw materials, benefits from a
lower New Zealand currency and a strong domestic U.S. market. The Company also
is redirecting its marketing efforts toward stronger economies in North America,
Europe and Latin America.
Unusually wet weather in the Southeast U.S. during the fourth quarter of 1997
and early 1998 is expected to raise Southeast U.S. fiber costs for both pulp and
lumber facilities, which will affect results in 1998. The adverse impact of
higher wood costs will be partially offset by increased prices for the Company's
Southeast U.S. timber.
RESULTS OF OPERATIONS, 1997 VS. 1996
Sales and Operating Income
Sales declined 6 percent to $1.1 billion in 1997, reflecting the closure of the
Port Angeles pulp mill on February 28, 1997, lower North American log trading
volume and export prices, lower New Zealand log volume and lower Northwest U.S.
timber selling prices, partially offset by higher lumber selling prices and
volume. Operating income for the year was $166 million, rising from $34 million
in 1996, due to the absence of the disposition charge of $125 million and
operating losses associated with the Port Angeles pulp mill, and higher lumber
selling prices and volume.
Timber and Wood Products
Sales of Timber and Wood Products declined 5 percent to $553 million,
while operating income declined 2 percent to $124 million. Lower
Northwest U.S. timber prices and New Zealand timber volume were
partially offset by strong U.S. lumber selling prices and volume and
favorable New Zealand exchange rates.
Trading and merchandising sales were $259 million compared to $322
million in 1996. The 20 percent decline was primarily due to weakness
in Asian wood markets, resulting in lower log prices and volume.
Although sales declined, operating income improved slightly,
principally due to favorable New Zealand exchange rates and margins.
Timberlands management sales of $184 million decreased 6 percent from
1996, and operating income declined primarily due to weaker Northwest
U.S. timber prices. Southeast U.S. timber volume improved due to a
strong pulpwood market.
Wood products sales increased 28 percent to $133 million in 1997 due to
stronger U.S. lumber sales volume and prices and start-up of the
medium-density fiberboard (MDF) business in New Zealand. Wood products
operating income improved from 1996 due to higher lumber prices and
volumes and lower conversion costs. The significant improvements
experienced in lumber were partially offset by operating losses
incurred in connection with the start-up of the New Zealand MDF
business, as the Company increased production to commercial levels and
developed markets in the Pacific Rim and Europe for its premium-quality
Patinna(TM) brand. Operating losses from the MDF business are expected
to continue in 1998.
Specialty Pulp Products
Sales of $520 million for the Company's Jesup and Fernandina pulp mills
were slightly above the prior year level with lower selling prices more
than offset by higher volume. Operating income of $56 million was $1
million below last year as lower average selling prices for both
chemical cellulose and fluff pulp were mostly offset by higher pulp
shipments and lower manufacturing costs. Pulp production costs declined
to $612 per ton in 1997 from $639 in 1996.
- 12 -
16
Intersegment
Intersegment sales of $3 million in 1997 were less than the $6 million
recorded in 1996 due to lower log sales from the Timber and Wood
Products segment to the Specialty Pulp Products segment.
Dispositions
Dispositions results include the Company's Port Angeles pulp mill,
permanently closed in February 1997, with product sales arising from
inventory. Improved results over 1996 primarily reflect the absence of
operating losses following the mill's closure. Sales were $34 million
in 1997 compared to $88 million in 1996, and operating income in 1997
was $3 million compared to an operating loss in 1996 of $10 million,
excluding closure charges.
Other Income/Expense
Interest expense for 1997 decreased $2 million to $26 million reflecting lower
average debt levels primarily due to reduced investment in working capital.
Capitalized interest relating to the Company's New Zealand MDF facility was $4.6
million in 1997 compared to $2.3 million in 1996.
Rayonier purchases forward exchange contracts to mitigate the impact of New
Zealand/U.S. dollar exchange fluctuations on operating results. The
mark-to-market loss on these contracts included in "Interest and miscellaneous
(expense) income, net," was $3 million in 1997, as compared to a mark-to-market
gain of $6 million in 1996. In 1997 the movement of the New Zealand/U.S. dollar
exchange rate from 0.71 on January 1, 1997, to 0.58 on December 31, 1997, had a
favorable effect of $5 million on the Company's New Zealand operating income, as
compared to a negative impact of $2 million in 1996 when the New Zealand
currency strengthened.
From time to time the Company opportunistically sells non-strategic assets to
maximize value from its asset mix. During the fourth quarter of 1997, the
Company sold a 75 percent interest in two New Zealand forests (12,100 acres) to
a timber investment fund and purchased a 25 percent stake in two other New
Zealand forests (3,700 acres) from the same fund in a transaction that resulted
in net cash proceeds to the Company of $11.7 million. As a result, a pretax gain
of $8.4 million, $5.6 million after-tax, or 19 cents per share, was realized.
Rayonier has management and marketing responsibilities for the joint venture,
which involves 15,800 acres of timber on New Zealand's North Island.
Minority interest in the earnings of Rayonier Timberlands, L.P. decreased $2
million to $26 million in 1997 due to lower Partnership earnings, primarily
reflecting lower Northwest U.S. timber prices.
Income Taxes
The effective tax rate for 1997 was 27.6 percent compared to 29.1 percent in
1996, excluding the tax benefits for two significant non-cash charges (see
Dispositions and Discontinued Operations), which were recorded at statutory
rates. These effective tax rates are below the U.S. statutory rates, primarily
resulting from the lower rates in effect for foreign subsidiaries. Additionally,
1997 reflects both research and investment tax credits and foreign exchange
translation gains while the prior year includes certain tax benefits recognized
in 1996 that pertained to prior years.
Acquisition of Minority Interest in RTLP
In January 1998, Rayonier exercised its right to acquire all of the 5,060,000
publicly traded Class A Units of RTLP for a cash purchase price of $13.00 per
unit in accordance with the terms of the RTLP Partnership Agreement. Rayonier's
income statement in the future will reflect the elimination of a minority
interest deduction and a reduction in selling and general expenses offset
somewhat by added timber cost depletion and interest expense associated with the
$66 million cost of acquiring the Class A Units. The acquisition will be
accounted for under the purchase method and was financed by the utilization of
existing credit facilities.
RESULTS OF OPERATIONS, 1996 VS. 1995
Sales and Operating Income
Sales declined 7 percent to $1.18 billion in 1996, reflecting lower fluff and
specialty paper pulp prices as well as reduced North American log trading volume
and lower New Zealand log pricing. Operating income for the year was $34
million, down from $234 million in 1995, due to the disposition charge of $125
million associated with the closure of the Port Angeles pulp mill and lower
fluff pulp pricing.
Timber and Wood Products
Sales of Timber and Wood Products declined 6 percent to $582 million,
and operating income declined 10 percent to $127 million. The declines
were due to lower export log volumes and margins, and lower timber
prices, partially
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17
offset by significantly improved wood products results. In 1996, the
New Zealand operations were divided into separate trading and
timberlands management organizations that are now reported as distinct
lines of business.
Trading and merchandising sales declined 18 percent to $322 million due
to lower North American log trading volume and operating income
declined due to weakness in Asian wood markets.
Timberlands management sales of $196 million, including additional
timber sales of $37 million from New Zealand activity, increased 17
percent from 1995 while operating income declined as lower timber
prices in both the Northwest and Southeast regions, resulting from weak
export and domestic log markets, offset increased harvest activity in
the Northwest.
Wood products sales increased 39 percent in 1996, and operating results
improved significantly due to higher lumber prices and volumes, lower
raw material costs and improved conversion costs.
Specialty Pulp Products
Sales of $514 million for the Company's Jesup and Fernandina pulp mills
were $26 million lower than 1995 and operating income of $57 million
declined $46 million from the prior year due to significantly lower
fluff and specialty paper pulp selling prices and unfavorable sales
mix. These impacts were partially offset by higher average chemical
cellulose prices and improved production costs.
Intersegment
Intersegment sales of $6 million in 1996 were less than the $20 million
recorded in 1995 due to lower log sales from the Timber and Wood
Products segment to the Specialty Pulp Products and Dispositions
segments.
Dispositions
Full year sales from the Port Angeles pulp mill of $88 million were $34
million below the prior year due to curtailed production as a result of
lower market prices. An operating loss, prior to closure charges, of
$10 million was $12 million worse than the prior year.
During the fourth quarter of 1996, Rayonier recorded a disposition
charge of $79 million after-tax, or $2.63 per share, primarily related
to the planned closure of the Port Angeles pulp mill on February 28,
1997. The pretax charge of $125 million included a $77 million loss on
disposal of mill assets with a net book value of $84 million, accruals
of $40 million for severance, relocation, demolition, environmental
cleanup and other items associated with the disposition, and $8 million
for loss on disposal of other non-strategic assets. The liquidation of
working capital and tax benefits associated with the closure offset
cash closure costs. Dismantling began in 1997 and is expected to be
substantially completed in 1998.
Other Income/Expense
Interest expense for 1996 decreased $6 million to $28 million as a result of
lower average debt, lower interest rates and higher capitalized interest.
Rayonier purchases forward exchange contracts to offset the impact of New
Zealand/U.S. dollar exchange fluctuations on operating results. The net gain on
these contracts, which is included in "Interest and miscellaneous (expense)
income, net," was $6 million in 1996 compared to $1 million for 1995. In 1996,
movement of the New Zealand/U.S. dollar exchange rate had an adverse effect on
the Company's New Zealand operating income of $2 million. The exchange rate
increased from 0.65 on January 1, 1996, to 0.71 on December 31, 1996.
A 1995 non-operating gain related to the sale of a 75 percent interest in
approximately 9 percent of the Company's New Zealand timber holdings to a timber
investment fund. The transaction resulted in a pretax gain of $35 million, $24
million after-tax, or 80 cents per share.
Minority interest in the earnings of RTLP decreased $2 million to $27 million
due to lower Partnership earnings resulting from lower timber prices in both the
Southeast and Northwest regions of the U.S., partially offset by volume
increases.
Income Taxes
Excluding the tax benefits for the two significant non-cash charges which were
booked at statutory rates, the effective tax rate for 1996 was 29.1 percent and
reflected the 1996 recognition of a tax asset related to a prior year
transaction following resolution of various uncertainties. The 1995 effective
tax rate of 31.6 percent reflected the benefits of foreign source income and tax
credits on exported pulp sales.
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Discontinued Operations
In the fourth quarter of 1996, the Company adopted Statement of Position 96-1
"Environmental Remediation Liabilities" issued by the American Institute of
Certified Public Accountants. Adoption of the pronouncement resulted in a cash
neutral pretax charge of $155 million ($98 million after-tax, or $3.28 per
share). The Company's annual cash flow was not impacted by the adoption of the
accounting pronouncement.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operating activities in 1997 was $253 million, or approximately
$9 per share, up $17 million from 1996. The favorable change was primarily due
to higher net income and reduced working capital requirements. This cash flow
financed capital expenditures of $137 million, dividends of $35 million and the
repurchase of Common Shares of $48 million.
Cash from operating activities in 1996 increased $23 million over 1995 levels to
$236 million. Cash from operating activities helped finance capital expenditures
of $187 million, dividends of $34 million, the repurchase of Common Shares of
$17 million and repayment of borrowings of $17 million.
The Company's cash tax payments were reduced in 1996 and 1997 as a result of
transactions undertaken by the Company to control environmental remediation and
monitoring costs, and certain benefits relating to the Port Angeles pulp mill
closure.
In 1996, the Company began a Common Share repurchase program to minimize the
dilutive effect on earnings per share of its employee incentive stock plans.
This program limits the number of shares that may be repurchased each year to
the greater of 1.5 percent of the Company's outstanding shares or the number of
incentive shares actually issued to employees during the year. In February 1997,
the Company announced a one-year increase in the share repurchase program. The
Company repurchased 1,123,500 shares at an average cost of $43.08 for $48
million as compared to 437,800 shares repurchased in 1996 at an average cost of
$37.74 for $17 million.
In 1997, EBITDA (defined as earnings from continuing operations before
significant non-recurring items, provision for dispositions, interest expense,
income taxes and depreciation, depletion and amortization) was $237 million, or
$8.07 per share, up $1 million from 1996. In 1996, EBITDA was $236 million, or
$7.86 per share, compared to $303 million, or $10.10 per share, in 1995. 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 $3 million to $122 million in 1997.
Debt declined $7 million in 1997 to $426 million. The year-end debt-to-capital
ratio of 40 percent is slightly lower than prior year-end. At December 31, 1995,
debt was $450 million, or 37 percent of capital. The percentage of debt with
fixed interest rates was 50 percent as of December 31, 1997 and 1996, and 48
percent in 1995. In addition, at December 31, 1997, the Company had outstanding
interest rate swap agreements that effectively converted $125 million of
floating rate obligations to fixed rates ranging from 5.35 to 5.39 percent. The
agreements commenced in January 1996 and matured in January 1998. In January
1998, the acquisition of the minority interest in RTLP for approximately $66
million increased the debt-to-capital ratio to approximately 44 percent.
The most restrictive long-term debt covenant in effect at December 31, 1997,
provided that the ratio of total debt to EBITDA not exceed 4 to 1. As of
December 31, 1997, the ratio was 1.9 to 1. In addition, $361 million of retained
earnings was unrestricted as to the payment of dividends.
Capital spending of $137 million in 1997 included $34 million for the Company's
New Zealand MDF facility (total cost of $115 million), which was completed in
the third quarter, and $12 million for advanced automation and control systems
in the pulp mills. Rayonier expects to invest $250-$300 million in capital
projects during the two-year period 1998-1999. Capital projects include profit
improvement, custodial capital, sawmill modernization, timberlands reforestation
and various projects to comply with new environmental laws and requirements. 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 of $25 million and as support for $56 million of
outstanding commercial paper. As of December 31, 1997, Rayonier had $219 million
available under its revolving credit facilities. (In January 1998, approximately
$66 million of these facilities was utilized to acquire the minority interest in
RTLP.) In addition, the Company has on file with the Securities and Exchange
Commission shelf
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19
registration statements to offer $100 million of new public debt securities,
after the issuance of an additional $41 million of medium-term notes in February
1998.
The Company believes that internally generated funds, combined with available
external financing, will enable Rayonier to fund capital expenditures, share
repurchases, working capital and other liquidity needs for the foreseeable
future.
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 10 years. During
1997, 1996 and 1995 Rayonier spent approximately $4 million, $6 million and $1
million, respectively, for capital projects related to environmental compliance
for ongoing operations. During the two-year period 1998-1999, Rayonier expects
to spend approximately $35 million on such capital projects.
During 1997, the Environmental Protection Agency (EPA) finalized its Cluster
Rules governing air emissions but, due to the specialty nature of Rayonier's
products and operations, postponed finalizing water discharge rules governing
the Company's pulp mills. The Company continues to work with the EPA to
establish appropriate water discharge rules for the pulp mills, but the timing
and costs associated with such rulemaking are uncertain. In the opinion of
management, capital costs to be incurred over the next three to five years
associated with environmental regulations will not exceed $30 million at the
Fernandina pulp mill and $50 million at the Jesup pulp mill.
Over the past several 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 and the marbled murrelet as threatened species under the
Endangered Species Act. These restrictions have caused Rayonier to restructure
and reschedule some of its harvest plans. In addition, several runs of salmon
are expected to be listed as threatened or endangered within the next year, and
rules implemented to protect them. Rayonier and other members of the forest
products industry in Washington state are currently engaged in negotiations with
regulatory agencies to obtain a predictable plan to protect fish and water. Such
efforts are ongoing and, in the opinion of management, will not have a material
impact on the Company's consolidated financial position or results of
operations.
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill which was closed on February 28, 1997; its interest in the Grays
Harbor, WA, pulp and paper complex which was closed in 1992; its wholly owned
subsidiary, Southern Wood Piedmont Company, which ceased operations in 1986; and
other miscellaneous assets held for disposition. Rayonier currently estimates
that expenditures for environmental remediation and monitoring costs for all
dispositions and discontinued operations during 1998-1999 will total
approximately $29 million. Such costs will be charged against Rayonier's
reserves for estimated environmental obligations (including monitoring and
remediation costs) to be incurred over the next 25-30 years with respect to
dispositions and discontinued operations. At December 31, 1997, these reserves
totaled approximately $199 million. The amount of actual future environmental
costs is dependent on the outcome of negotiations with federal and state
agencies and may also be affected by new laws, regulations and administrative
interpretations, and changes in environmental remediation technology. The
Company believes that any future changes in estimates, if necessary, will not
materially affect its consolidated financial condition or results of operations.
YEAR 2000 COMPLIANCE
Rayonier believes its information systems will be compliant with year 2000
requirements as a result of normal, planned upgrades, without incurring a
material incremental cost.
SAFE HARBOR
Except for the information about past operations and results, the comments in
this report are forward-looking and are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Changes in
the following important factors, among others, could cause actual results to
differ materially from those expressed in the forward-looking statements:
competitive products and pricing, as well as fluctuations in demand,
particularly for specialty fluff pulps and for export and domestic logs and wood
products, including MDF; the impact of such market factors on the Company's
timber sales in the U.S. and New Zealand; the impact of Asia market conditions
on prices and volumes; production costs for specialty pulps, particularly for
raw materials and chemicals; governmental policies and regulations affecting the
environment, import and export controls and taxes; and interest rate and
currency movements.
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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
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 is incorporated herein by reference to the
definitive proxy statement referred to above in Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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, D and E for a list of the exhibits
filed or incorporated herein as part of this report.
(b) Reports on Form 8-K:
1. Rayonier Inc. filed a Current Report on Form 8-K on January 16, 1998
announcing its election to purchase all of the 5,060,000 outstanding
Class A Depositary Units of Rayonier Timberlands, L.P. in January 1998
for a cash purchase price of $13.00 per unit.
- 17 -
21
REPORT OF MANAGEMENT
To Our Shareholders
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 policies, procedures and a written code of conduct 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.
RONALD M. GROSS
Chairman and Chief Executive Officer
GERALD J. POLLACK
Senior Vice President and
Chief Financial Officer
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, 1997 and
1996, and for each of the three years in the period ended December 31, 1997, 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut
January 21, 1998
F-1
22
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
For the Year Ended December 31,
(Thousands of dollars, except per share data)
1997 1996 1995
----------- ----------- -----------
SALES $ 1,104,228 $ 1,178,040 $ 1,260,492
----------- ----------- -----------
Costs and expenses
Cost of sales 902,734 981,337 994,982
Selling and general expenses 42,410 39,409 37,043
Other operating (income) expense, net (7,046) (1,210) (5,210)
Provision for dispositions -- 124,587 --
----------- ----------- -----------
938,098 1,144,123 1,026,815
----------- ----------- -----------
OPERATING INCOME 166,130 33,917 233,677
Interest expense (25,868) (27,662) (33,615)
Interest and miscellaneous (expense) income, net (2,490) 7,762 3,131
Gains from sale of assets 8,395 -- 34,763
Minority interest (25,520) (27,474) (29,897)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 120,647 (13,457) 208,059
Income tax (expense) benefit (33,328) 13,297 (65,711)
----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 87,319 (160) 142,348
Provision for discontinued operations, net -- (98,239) --
----------- ----------- -----------
NET INCOME (LOSS) $ 87,319 $ (98,399) $ 142,348
=========== =========== ===========
BASIC EPS
Continuing operations $ 3.03 $ (--) $ 4.81
Discontinued operations -- (3.28) --
----------- ----------- -----------
Net income (loss) $ 3.03 $ (3.28) $ 4.81
=========== =========== ===========
DILUTED EPS
Continuing operations $ 2.97 $ (--) $ 4.75
Discontinued operations -- (3.28) --
----------- ----------- -----------
Net income (loss) $ 2.97 $ (3.28) $ 4.75
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-2
23
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Thousands of dollars)
ASSETS
1997 1996
------------- ---------
CURRENT ASSETS
Cash and short-term investments $ 10,661 $ 3,432
Accounts receivable, less allowance for doubtful
accounts of $4,481 and $4,674 115,704 123,435
Inventories 114,148 154,914
Timber purchase agreements 31,758 31,416
Other current assets 13,955 13,223
Deferred income taxes 24,288 23,168
------------- -------------
Total current assets 310,514 349,588
OTHER ASSETS 55,791 50,026
TIMBER PURCHASE AGREEMENTS 28,248 23,341
TIMBER, TIMBERLANDS AND LOGGING ROADS,
NET OF DEPLETION AND AMORTIZATION 497,110 490,298
PROPERTY, PLANT AND EQUIPMENT
Land, buildings, machinery and equipment 1,266,431 1,190,786
Less - accumulated depreciation 562,536 506,308
------------- -------------
703,895 684,478
------------- -------------
$ 1,595,558 $ 1,597,731
============= =============
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-3
24
RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
(Thousands of dollars)
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
------------- ---------
CURRENT LIABILITIES
Accounts payable $ 74,269 $ 87,609
Bank loans and current maturities 4,194 2,243
Accrued taxes 10,973 11,497
Accrued payroll and benefits 18,694 18,340
Accrued interest 6,076 5,154
Other current liabilities 66,085 55,976
Current reserves for dispositions and discontinued operations 26,247 40,003
------------- -------------
Total current liabilities 206,538 220,822
DEFERRED INCOME TAXES 113,442 89,484
LONG-TERM DEBT 421,325 430,667
NON-CURRENT RESERVES FOR DISPOSITIONS AND
DISCONTINUED OPERATIONS 172,615 183,975
OTHER NON-CURRENT LIABILITIES 31,997 30,529
MINORITY INTEREST 16,959 18,864
SHAREHOLDERS' EQUITY
Common Shares, 60,000,000 shares authorized,
28,283,634 and 29,282,455 shares issued
and outstanding 102,175 145,679
Retained earnings 530,507 477,711
------------- -------------
632,682 623,390
------------- -------------
$ 1,595,558 $ 1,597,731
============= =============
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-4
25
RAYONIER INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Year Ended December 31,
(Thousands of dollars)
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 87,319 $ (98,399) $ 142,348
Non-cash items included in income
Depreciation, depletion and amortization 99,309 96,910 95,988
Deferred income taxes 14,045 (80,235) 16,617
Write-off of property, plant and equipment 2,100 94,164 --
Reserve for dispositions and discontinued operations -- 192,623 --
Disposition of New Zealand timber assets 4,634 -- 9,440
Increase in other non-current liabilities 1,468 5,325 1,509
Change in accounts receivable, inventories and accounts payable 35,157 2,678 (55,645)
(Increase) decrease in current timber purchase agreements (342) 16,025 (2,126)
(Increase) decrease in other current assets (732) 2,189 (2,720)
Increase in accrued liabilities 10,861 9,261 12,156
Reduction in reserves for dispositions (900) (5,000) (4,933)
--------- --------- ---------
CASH FROM OPERATING ACTIVITIES 252,919 235,541 212,634
--------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures, net of sales and retirements
of $4,691 , $11,544 and $3,931 (132,272) (175,200) (139,395)
Expenditures for dispositions and discontinued operations,
net of tax benefits of $8,793, $1,185 and $5,493 (15,423) (2,049) (9,352)
Change in timber purchase agreements and other assets (10,672) (1,433) 3,232
--------- --------- ---------
CASH USED FOR INVESTING ACTIVITIES (158,367) (178,682) (145,515)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of debt 342,226 40,472 35,437
Repayments of debt (349,617) (57,298) (68,923)
Dividends paid (34,523) (34,229) (29,629)
Repurchase of Common Shares (48,396) (16,522) --
Issuance of Common Shares 4,892 3,169 1,451
(Decrease) increase in minority interest (1,905) 49 (3,701)
--------- --------- ---------
CASH USED FOR FINANCING ACTIVITIES (87,323) (64,359) (65,365)
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS
Increase (decrease) in cash and short-term investments 7,229 (7,500) 1,754
Balance, beginning of year 3,432 10,932 9,178
--------- --------- ---------
Balance, end of year $ 10,661 $ 3,432 $ 10,932
========= ========= =========
Supplemental disclosures of cash flow information Cash paid during
the year for:
Interest $ 29,951 $ 30,440 $ 34,208
========= ========= =========
Income taxes $ 8,671 $ 7,462 $ 41,760
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
F-5
26
RAYONIER INC. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless otherwise stated)
1. NATURE OF BUSINESS OPERATIONS
Rayonier operates in two major industry segments, Timber and Wood Products and
Specialty Pulp Products.
TIMBER AND WOOD PRODUCTS
Rayonier owns, leases or controls approximately 1.5 million acres of timberlands
in the U.S. and New Zealand. The Company also purchases and harvests timber and
purchases logs, lumber and wood panel products, primarily in North America and
New Zealand, for subsequent sale into export markets (primarily Japan, Korea and
China), as well as to domestic customers. Rayonier operates three lumber
manufacturing facilities in the U.S. that produce dimension and custom lumber
products for residential construction and industrial uses, and a
medium-density-fiberboard (MDF) facility in New Zealand that produces premium
grade MDF sold into Pacific Rim and European markets. The MDF facility began
commercial operation on October 1, 1997.
SPECIALTY PULP PRODUCTS
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. With the closure of the Port Angeles, WA, pulp mill on February 28,
1997, the Company now operates two pulp mills in the U.S. at Jesup, GA, and
Fernandina Beach, FL, with an aggregate annual capacity of 700,000 metric tons.
Over half of Rayonier's pulp production is sold to export customers, primarily
in Europe and Asia.
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.
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.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash, time deposits and readily
marketable debt securities with maturities at date of acquisition of three
months or less.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of manufactured
pulp and MDF products is determined on the first-in, first-out (FIFO) basis.
Other 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.
F-6
27
TIMBER PURCHASE AGREEMENTS AND TIMBER-CUTTING CONTRACTS
Rayonier purchases timber for use in its log trading, pulp and wood products
businesses. The purchases are classified as current for timber 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 purchases 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
fully 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
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, primarily
the New Zealand MDF facility, amounted to $5,005, $2,664, and $1,346 during
1997, 1996 and 1995, 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 and MDF 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 $9,656, $11,000, and
$8,442 in 1997, 1996 and 1995, 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 $82 million of undistributed foreign earnings as
the Company intends to permanently reinvest such earnings in expanding foreign
operations.
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 exchange 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 "Other operating (income) expense, net."
EARNINGS (LOSS) PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" and restated earnings per share reported in all
prior periods to conform with current requirements.
F-7
28
The following table provides details of the calculation of basic and diluted EPS
for 1997, 1996 and 1995.
1997 1996 1995
----------- --------------- -----------
Income (loss) from continuing operations $ 87,319 $ (160) $ 142,348
=========== =============== ===========
Shares used for determining basic EPS 28,820,115 29,978,012 29,624,049
Dilutive effect of:
Stock options 389,131 * 175,834
Contingent shares 221,250 * 183,000
----------- --------------- -----------
Shares used for determining diluted EPS 29,430,496 29,978,012 29,982,883
=========== =============== ===========
Basic EPS-continuing operations $ 3.03 $ (--) $ 4.81
=========== =============== ===========
Diluted EPS-continuing operations $ 2.97 $ (--) $ 4.75
=========== =============== ===========
* Outstanding stock options and contingent shares would be antidilutive in
1996 and therefore were excluded.
3. SUBSEQUENT EVENT (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 Depository Units. Thereafter, Rayonier
offered and sold 5.06 million Class A Units (25.3 percent) to the public. Class
A Units participate principally in the revenues and costs associated with RTLP's
sales of timber through the Initial Term, that will end on December 31, 2000,
and to a significantly lesser extent in subsequent periods.
In January 1998, Rayonier exercised its right to acquire all of the publicly
traded Class A Units for a cash purchase price of $13.00 per unit. The
acquisition will be accounted for under the purchase method and was financed by
the utilization of existing credit facilities.
RTLP is included in the consolidated financial statements. The following table
summarizes the sales and operating income of RTLP, for the three years ended
December 31, 1997, by region.
1997 1996 1995
---- ---- ----
SALES
Northwest U.S. $ 80,570 $ 91,691 $ 95,168
Southeast U.S. 58,555 56,215 65,100
------------- ------------- -------------
$ 139,125 $ 147,906 $ 160,268
============ ============ ============
OPERATING INCOME
Northwest U.S. $ 58,970 $ 68,083 $ 73,393
Southeast U.S. 46,440 44,849 51,693
Corporate and other (1,711) (1,715) (1,778)
------------- ------------- -------------
$ 103,699 $ 111,217 $ 123,308
============ ============ ============
F-8
29
4. INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
----------- ------------ --------
CURRENT
U.S. federal $ 6,531 $ 5,446 $ 36,564
State and local 1,292 2,290 2,779
Foreign 1,709 1,596 4,258
----------- ------------ ------------
9,532 9,332 43,601
----------- ------------ ------------
DEFERRED
U.S. federal 24,652 (70,108) 12,386
State and local 540 (6,469) 1,081
Foreign (1,396) (2,813) 8,643
----------- ------------ ------------
23,796 (79,390) 22,110
------------ ------------ ------------
$ 33,328 $ (70,058) $ 65,711
============ ============ ============
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, 1997 and 1996 were
related to the following principal timing differences:
1997 1996
-------------- --------------
Accelerated depreciation and depletion $ (133,521) $ (130,586)
Reserves for dispositions and discontinued operations 39,907 69,601
All other, net 4,460 (5,331)
-------------- -------------
$ (89,154) $ (66,316)
============== =============
A reconciliation of the income tax provision at the U.S. statutory rate to the
reported income tax provision follows:
1997 1996 1996* 1995
-------- -------- -------- --------
Income tax provision at U.S. statutory rate $ 42,226 $(58,960) $ 38,896 $ 72,821
State and local taxes, net of federal tax benefit 1,191 (2,716) 1,806 2,509
Foreign operations (5,647) (4,988) (4,988) (4,697)
Foreign sales corporations (2,200) (2,391) (2,391) (3,816)
Research and development tax credits (1,675) -- -- --
All other, net (567) (1,003) (1,003) (1,106)
-------- -------- -------- --------
Provision for income taxes - reported $ 33,328 $(70,058) $ 32,320 $ 65,711
======== ======== ======== ========
Effective tax rate - % 27.6 (41.6) 29.1 31.6
* Excludes the tax benefits of $102 million for the two significant non-cash
charges in 1996.
5. INVENTORIES
Rayonier's inventories included the following at December 31, 1997 and 1996:
1997 1996
------------ ------------
Finished goods $ 51,398 $ 68,441
Work in process 17,491 20,128
Raw materials 19,740 39,650
Manufacturing and maintenance supplies 25,519 26,695
------------ ------------
$ 114,148 $ 154,914
============ ============
F-9
30
6. RESERVES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
Dispositions and discontinued operations include Rayonier's Port Angeles, WA,
pulp mill, which was closed on February 28, 1997; its interest in the Grays
Harbor, WA, pulp and paper complex which was closed in 1992; its wholly owned
subsidiary, Southern Wood Piedmont Company, which ceased operations in 1986; and
other miscellaneous assets held for disposition.
In the fourth quarter of 1996, Rayonier recorded a disposition charge of $79
million after-tax, or $2.63 per share, primarily related to the closure of the
Port Angeles pulp mill. The Company concluded that the mill was not competitive
in world markets because of long-term high wood costs due to federal
environmental restrictions on Northwest timber harvests, viscose pulp capacity
additions in lower cost regions of the world and anticipated large expenditures
for new environmental regulations. The $125 million pretax charge included a $77
million loss on disposal of mill assets with a net book value of $84 million,
accruals of $40 million for severance, relocation, demolition, environmental
cleanup and other items associated with the disposition, and $8 million for loss
on disposal of other non-strategic assets. Dismantling and demolition of the
mill began in 1997 and is expected to be substantially completed in 1998. During
1997, Port Angeles pulp product sales contributed $3 million to operating
income.
In the fourth quarter of 1996, the Company also adopted Statement of Position
96-1 "Environmental Remediation Liabilities" issued by the American Institute of
Certified Public Accountants. The statement specifically identified future,
long-term monitoring and administration expenditures as remediation liabilities
that need to be accrued on the balance sheet as an existing obligation. Adoption
of the pronouncement resulted in a cash neutral pretax charge of $155 million,
$98 million after-tax, or $3.28 per share. Although the Company had already
accrued for cleanup and closure remediation liabilities associated with its
Southern Wood Piedmont Company (SWP) wood treating business (discontinued in
1986), the cash expenditures for monitoring and administration activities of
approximately $4 million pretax, or 8 cents per share, had been expensed as
incurred in 1995 and 1996. These monitoring costs are expected to continue on an
annual basis, plus inflation, for approximately 25-30 years as mandated by state
and federal regulations. The Company's annual cash flow was not impacted by
adoption of the accounting pronouncement.
As of December 31, 1997 and 1996, Rayonier had $11.5 million 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 during 1998-1999 for
environmental remediation and monitoring costs for all dispositions and
discontinued operations will total approximately $29 million. Such costs will be
charged against Rayonier's reserves for estimated environmental obligations
(including monitoring and remediation costs) to be incurred over the next 25-30
years with respect to dispositions and discontinued operations. At December 31,
1997, these reserves totaled approximately $199 million. The amount of actual
future environmental costs is dependent on the outcome of negotiations with
federal and state agencies and may also be affected by new laws, regulations and
administrative interpretations, and changes in environmental remediation
technology. The Company believes that any future changes in estimates, if
necessary, will not materially affect its consolidated financial condition or
results of operations.
7. GAINS FROM SALE OF ASSETS
From time to time Rayonier opportunistically sells non-strategic assets to
maximize value from its asset mix. In December 1997, the Company sold a 75
percent interest in approximately 6 percent of its timber holdings in New
Zealand to a timber investment fund advised by UBS Resource Investments Int'l.
Rayonier acquired a 25 percent interest in two forests owned by the investment
fund. Rayonier received net cash proceeds of $11.7 million and recorded a pretax
gain of $8.4 million, $5.6 million after-tax, or 19 cents per share. In
September 1995, the Company sold a 75 percent interest in approximately 9
percent of its New Zealand timber holdings to the timber investment fund as part
of a similar joint venture with the Company. The transaction resulted in a
pretax gain of $34.8 million, $23.9 million after-tax, or 80 cents per share.
Rayonier has marketing and management responsibilities for both joint ventures.
F-10
31
8. DEBT
Rayonier's debt included the following at December 31, 1997 and 1996:
1997 1996
------------ ------------
Short-term bank loans at a weighted average rate of 6.37% $ 123,352 $ 15,514
Commercial paper at discount rates of 6.00% to 6.13% 56,000 135,000
Medium-term note due 1998 at a variable interest rate of 6.2% 33,000 67,000
Medium-term notes due 1998-1999 at fixed interest rates
of 5.84% to 6.16% 16,000 16,000
7.5% notes due 2002 110,000 110,000
Pollution control and industrial revenue bonds due
1998-2015 at fixed interest rates of 5.2% to 8.0% 86,830 88,910
All other 337 486
------------ ------------
Total debt 425,519 432,910
Less:
Short-term bank loans 1,852 14
Current maturities 2,342 2,229
------------ ------------
Long-term debt $ 421,325 $ 430,667
============ ============
Rayonier has revolving credit agreements with a group of banks that provide the
Company with unsecured credit facilities totaling $300 million and expiring in
2002. The revolving credit facilities are used for direct borrowings and as
credit support for a commercial paper program. As of December 31, 1997, the
Company had $56 million of outstanding commercial paper, $25 million of direct
borrowings and $219 million of available borrowings under its revolving credit
facilities.
On March 29, 1994, the Company filed a shelf registration statement with the
Securities and Exchange Commission on Form S-3 covering $150 million of new debt
securities. The registration statement also served as a post-effective amendment
to a 1992 registration statement, which, as amended, permitted Rayonier to offer
up to $174 million of medium-term notes. On August 18, 1994, Rayonier issued
$100 million of variable rate medium-term notes. An additional $33 million of
medium-term notes were issued in 1995 to replace maturing notes. The note
outstanding as of December 31, 1997, matures in 1998 and bears interest at a
variable rate of three-month LIBOR plus 0.29 percent. In addition, through
currently effective shelf registration statements filed with the Securities and
Exchange Commission, Rayonier may offer up to $141 million of new public debt
securities.
Required repayments of debt are as follows:
1998 $ 4,194
1999 17,475
2000 2,420
2001 2,185
2002 323,810
2003-2015 75,435
-----------
$ 425,519
=============
Medium-term notes, commercial paper and short-term bank loans totaling $211.5
million 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, 1997, provided
that the ratio of total debt to EBITDA not exceed 4 to 1. As of December 31,
1997, the ratio was 1.9 to 1. In addition, $361 million of retained earnings was
unrestricted as to the payment of dividends.
F-11
32
9. FINANCIAL INSTRUMENTS
INTEREST RATE SWAPS
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.
At December 31, 1997, the Company had interest rate swap agreements with a total
notional value of $125 million, expiring January 2, 1998. The agreements
effectively convert floating rate obligations to fixed rates ranging from 5.35
to 5.39 percent. The Company has another interest rate swap agreement with a
total notional value of $50 million effective for the period January 2, 1998,
through December 31, 1998, and fixing rates at 6.45 percent. If the Company were
to terminate its existing interest rate swap agreements, any resulting gain or
loss would be deferred and recognized over the remaining life of the related
debt.
FOREIGN CURRENCY CONTRACTS
Rayonier enters into forward exchange contracts to help mitigate the adverse
impact of foreign currency fluctuations on the Company's New Zealand net
currency exposure. Rayonier's forward contracts are intended to cover
anticipated operating needs and therefore do not "hedge" firm contracts or
commitments in accordance with SFAS No. 52, "Foreign Currency Translation." As a
result, the gains and losses on these contracts are included in "Interest and
miscellaneous (expense) income, net" based on mark-to-market values at reporting
dates. In 1997, the maximum foreign currency contracts outstanding at any point
in time totaled $32,561. At December 31, 1997, the Company held foreign currency
contracts maturing through November 1998 totaling $23,605.
COMMODITY FORWARDS
The Company periodically enters into commodity forwards to fix certain raw
material and energy costs. This practice effectively eliminates the risk of a
change in product margins resulting from an increase or decrease in fuel oil
costs. The Company does not enter into commodity forwards for trading or
speculative purposes. The net amounts paid or received under the agreements are
recognized as an adjustment to fuel oil expense. There were no contracts
outstanding at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1996, the estimated fair values of Rayonier's financial
instruments were as follows:
1997 1996
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and short-term investments $ 10,661 $ 10,661 $ 3,432 $ 3,432
Debt 425,519 438,310 432,910 440,195
Foreign currency contracts (2,365) (2,365) 1,504 1,504
Interest rate swap agreements - (287) - 428
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.
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.
F-12
33
Foreign Currency Contracts - The fair value of foreign currency contracts is
based on dealer-quoted market prices of comparable instruments. The contracts
are reported at mark-to-market values if not considered a hedge for accounting
purposes.
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.
10. SHAREHOLDERS' EQUITY
An analysis of activity in shareholders' equity for the three years ended
December 31, 1997 follows:
Total
Common Shares Retained Shareholders'
Shares Amount Earnings Equity
--------------- --------------- --------------- ---------------
BALANCE, JANUARY 1, 1995 29,574,807 $ 157,581 $ 497,620 $ 655,201
Net income - - 142,348 142,348
Dividends paid - - (29,629) (29,629)
Incentive stock plans 78,471 1,451 - 1,451
--------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 1995 29,653,278 159,032 610,339 769,371
Net loss - - (98,399) (98,399)
Dividends paid - - (34,229) (34,229)
Incentive stock plans 66,977 3,169 - 3,169
Repurchase of Common Shares (437,800) (16,522) - (16,522)
--------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 1996 29,282,455 145,679 477,711 623,390
Net Income - - 87,319 87,319
Dividends paid - - (34,523) (34,523)
Incentive stock plans 124,679 4,892 - 4,892
Repurchase of Common Shares (1,123,500) (48,396) - (48,396)
--------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 1997 28,283,634 $ 102,175 $ 530,507 $ 632,682
=============== =============== =============== ===============
11. 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. Under
the 1994 Plan, the Company may grant options to its employees for up to 4.5
million Common Shares. The exercise price of each option equals the market price
of the Company's stock on the date of grant, and an option's maximum term is 10
years. Options vest in one-third increments over a three-year period starting
from the date of grant.
Restricted stock granted under the 1994 Plan vests after three years. During
1997, 1996 and 1995, 2,000, 27,500 and 6,000 restricted shares were granted with
grant-date fair values of $38.13, $33.38 and $30.00 for 1997, 1996 and 1995,
respectively.
In 1997, 1996 and 1995, 93,000, 48,000 and 82,500 Common Shares, respectively,
were reserved for contingent performance shares. The actual number of
performance shares to be issued is contingent upon the Company's total
shareholder return, as defined, compared with a competitive peer group of 12
companies within the forest products industry over a three-year period. The
grant-date fair values of the 1997, 1996 and 1995 performance shares were
$38.13, $33.38 and $30.00 respectively.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" to account for its stock plans. The compensation cost recognized was
$3,904, $3,737 and $2,338 in 1997, 1996 and 1995, respectively. Under SFAS No.
123 "Accounting for Stock Based Compensation," net income (loss) and earnings
(loss) per share would have been reduced (increased) by $1,431 or 5 cents per
share, $1,008 or 3 cents per share and $522 or 2 cents per share for 1997, 1996
and 1995, respectively. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996, and 1995,
respectively: dividend yield of 3.0 percent for 1997 and 3.1 percent for 1996
and 1995; expected volatility of 22.5 percent for all years; risk-free interest
rates of 6.3 percent, 5.6 percent and 7.9 percent; and an expected life of 7.5
years for all years. The weighted average fair value of options granted during
the year was $10.46, $8.39 and $9.20 for 1997, 1996 and 1995, respectively.
F-13
34
A summary of the status of the Company's stock option plans as of December 31,
1997, 1996 and 1995, and changes during the years then ended is presented below:
1997 1996 1995
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercisable of Exercisable of Exercisable
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 1,268,288 $29.99 974,614 $28.64 721,019 $27.14
Granted - 1994 Incentive
Stock Plan 370,500 $38.34 355,000 $33.53 346,000 $30.03
Exercised (80,345) $28.24 (39,477) $27.79 (72,471) $20.02
Canceled (6,832) $36.01 (21,849) $31.38 (19,934) $29.72
--------- --------- ---------
Outstanding at end of year 1,551,611 $32.05 1,268,288 $29.99 974,614 $28.64
========= ========= =========
Options exercisable at
year-end 857,833 $29.23 596,001 $28.13 264,140 $25.14
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding
-------------------------------------
Range Number Weighted Average Options
of Outstanding Remaining Exercisable Weighted Average
Exercise Prices at 12/31/97 Contractual Life at 12/31/97 Exercise Price
--------------- ----------- ---------------- ----------- --------------
$16.57 - $19.72 90,322 2.9 years 90,322 $18.47
$28.88 - $31.35 752,589 6.5 years 647,783 $29.93
$33.38 - $48.56 708,700 8.5 years 119,728 $33.35
12. 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.
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. The
following table sets forth net periodic pension cost of Rayonier plans and total
pension expense for the three years ended December 31:
1997 1996 1995
---------- ---------- -------
Defined Benefit Plans
Service cost $ 4,871 $ 5,136 $ 4,022
Interest cost 7,461 7,311 6,348
Return on assets (21,788) (14,254) (23,105)
Net amortization and deferral 13,580 6,672 15,463
---------- ---------- ------
Net periodic pension cost of Rayonier plans 4,124 4,865 2,728
Other Pension Cost
Defined contribution plans 2,437 2,326 1,872
---------- ---------- ---------
Total pension expense $ 6,561 $ 7,191 $ 4,600
========== ========== =========
F-14
35
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, 1997
and 1996 and the principal weighted-average assumptions inherent in their
determination:
1997 1996
---------- --------
Actuarial Present Value of Benefit Obligations
Vested benefits $ 101,488 $ 94,878
========== ==========
Accumulated benefits $ 107,851 $ 101,064
========== ==========
Projected benefits $ 113,407 $ 105,899
Plan assets at fair value 119,862 110,397
---------- -------
Plan assets in excess of projected benefits 6,455 4,498
Unrecognized net gain (5,167) (6,532)
Unrecognized past service cost 11,618 12,851
Curtailment effects and termination benefits (2,952) -
Unrecognized net assets (3,505) (4,369)
----------- ----------
Prepaid pension asset $ 6,449 $ 6,448
========== ==========
Actuarial Assumptions (%)
Discount rate 7.00 7.50
Rate of return on invested assets 9.75 9.75
Salary increase assumption 5.00 5.00
The table for 1997 reflects the costs of curtailment and special termination
benefits of an hourly Rayonier pension plan as a result of the closure of the
Port Angeles pulp mill. See Note 6. The costs of $2,952 were recorded as part of
the 1996 charge of $125 million primarily related to the Port Angeles pulp mill
closure and were accounted for in accordance with SFAS No. 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits."
Postretirement Health and Life
Rayonier provides health care and life insurance benefits for certain employees
upon retirement. The following table sets forth postretirement health care and
life insurance benefits expense for the three years ended December 31:
1997 1996 1995
---------- ---------- ---------
Service cost $ 407 $ 429 $ 598
Interest cost 1,305 1,254 1,847
Net amortization and deferral 138 (289) 319
---------- ---------- ---------
Net periodic expense of Rayonier plans 1,850 1,394 2,764
Multi-employer plans 592 393 -
---------- ---------- ---------
Total postretirement benefits expense $ 2,442 $ 1,787 $ 2,764
========== ========== =========
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, 1997 and 1996 and the principal weighted-average
assumptions inherent in their determination:
1997 1996
---------- -----------
Accumulated postretirement benefit obligation $ 20,405 $ 17,915
Unrecognized net loss (10,424) (9,328)
Unrecognized prior service cost 3,951 8,482
---------- ----------
Liability recognized in the balance sheet $ 13,932 $ 17,069
========== ==========
Actuarial Assumptions (%)
Discount rate 7.00 7.50
Ultimate health care trend rate 5.00 5.00
The assumed rate of future increases in the per capita cost of health care (the
health care trend rate) was 8 percent for 1997, decreasing ratably to 5 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 $567 and the annual expense by $45.
F-15
36
13. COMMITMENTS
The Company leases certain buildings, machinery and equipment under various
operating leases. As of December 31, 1997, minimum rental commitments under
operating leases are $5,704, $5,085, $4,619, $9,959 and $1,746 for 1998, 1999,
2000, 2001 and 2002, respectively. For the remaining years, such commitments
amount to $3,848, aggregating total minimum lease payments of $30,961. Total
rental expense for operating leases amounted to $7,545, $5,609, and $7,373 in
1997, 1996 and 1995, respectively. Additionally, the Company has indirectly
guaranteed approximately $23.6 million of debt that is secured by equipment used
by its vendors to provide products to the Company.
14. CONTINGENCIES
From time to time, Rayonier may become liable with respect to pending and
threatened litigation and environmental and other matters.
Legal Proceedings
Rayonier has been designated a potentially responsible party, or has had other
claims made against it, under the U.S. Comprehensive Environmental Response,
Compensation and Liability Act and/or comparable state statutes at eight sites,
all of which relate to operations classified under "Dispositions and
Discontinued Operations." Rayonier is a de minimis participant in proceedings
involving two of these sites. In addition, the Company is negotiating consent
orders with state environmental agencies for environmental remediation at two
additional sites. Rayonier believes that an appropriate provision for
remediation costs at these sites is included in its reserves for estimated
environmental obligations with respect to dispositions and discontinued
operations. See Note 6.
In addition, there are various lawsuits pending against or affecting Rayonier
and its subsidiaries, some of which involve claims for substantial sums, but
whose outcomes are not expected to materially impact the Company's consolidated
financial position or results of operations. In particular, Rayonier is one of
two defendants in an action seeking indemnity for $57 million in damages
incurred as the result of a fire and explosion at a storage facility where a
Rayonier pulp manufacturing by-product was stored. Rayonier is vigorously
defending the action, believes that its defenses are meritorious and based on
advice of counsel, believes that its liability, if any, will not be material and
will be covered by its product liability insurance.
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.
During 1997, the EPA finalized its Cluster Rules governing air emissions but,
due to the specialty nature of Rayonier's products and operations, postponed
finalizing water discharge rules governing the Company's pulp mills. The Company
continues to work with the EPA to establish appropriate water discharge rules
for the pulp mills, but the timing and costs associated with such rulemaking is
uncertain. In the opinion of management, future capital costs associated with
existing environmental rules will not have a material impact on the Company's
consolidated financial position or results of operations.
Over the past several years, the Company has worked with the state of Washington
to implement protective measures with respect to several endangered species. The
effect has been to restrict harvesting in various habitats on Company land. Such
efforts are ongoing and, in the opinion of management, will not have a material
impact on the Company's consolidated financial position or results of
operations.
F-16
37
15. SEGMENT INFORMATION
Please refer to "Item 7 - Segment Information" where information regarding
business segment sales and operating income is provided. Additional segment
information for the three years ended December 31 follows (millions of dollars):
DEPRECIATION,
GROSS PLANT ADDITIONS DEPLETION AND AMORTIZATION IDENTIFIABLE ASSETS
1997 1996 1995 1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------
Timber and Wood Products $ 75 $ 109 $ 72 $ 31 $ 28 $ 26 $ 828 $ 797 $ 737
Specialty Pulp Products 61 71 65 66 60 59 691 703 708
Corporate and other 1 1 3 1 -- 1 46 49 49
Dispositions -- 6 3 1 9 10 31 49 154
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $ 137 $ 187 $ 143 $ 99 $ 97 $ 96 $1,596 $1,598 $1,648
====== ====== ====== ====== ====== ====== ====== ====== ======
Custodial capital spending was $72 million, $83 million and $72 million in 1997,
1996 and 1995, respectively. Custodial capital spending is defined as capital
expenditures to maintain current earnings level over the cycle and to keep
facilities and equipment in safe and reliable condition, and in compliance with
regulatory requirements.
GEOGRAPHICAL OPERATING INFORMATION
Information by geographical operating area for the three years ended December 31
follows (millions of dollars):
OPERATING
LOCATION SALES OPERATING INCOME IDENTIFIABLE ASSETS
1997 1996 1995 1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------
United States $ 992 $1,059 $1,126 $ 163 $ 32 $ 222 $1,222 $1,275 $1,393
New Zealand 90 96 106 8 5 13 357 301 237
All other 22 23 28 (5) (3) (1) 17 22 18
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,104 $1,178 $1,260 $ 166 $ 34 $ 234 $1,596 $1,598 $1,648
====== ====== ====== ====== ====== ====== ====== ====== ======
EXPORT SALES
Sales of products produced in various countries for export to other countries
consisted of the following (millions of dollars):
OPERATING SALES
LOCATION DESTINATION 1997 % 1996 % 1995 %
---- - ---- - ---- -
United States Asia Pacific $ 227 46 $327 54 $ 368 53
Western Europe 127 26 138 23 146 21
All other 77 15 78 12 102 15
------ ---- ------ ---- ------ ----
431 87 543 89 616 89
------ ---- ------ ---- --- ----
New Zealand Asia Pacific 46 9 47 8 61 9
United States 5 1 4 - 3 -
------ ---- ------ ---- ------ ----
51 10 51 8 64 9
All other Primarily Asia Pacific 17 3 13 3 14 2
------ ---- ------ ---- ------ ----
Total $ 499 100 $607 100 $ 694 100
====== === === === ====== ===
16. NEW ZEALAND - FOREIGN CURRENCY EXPOSURE AND RISK MANAGEMENT
Rayonier's New Zealand operations generate approximately 8 percent of the
Company's sales. 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. 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
contribution of its New Zealand operations toward what it would have been
without exchange rate movements. The Company
F-17
38
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.
The following summarizes the contribution to Rayonier's earnings from New
Zealand operations after consideration of foreign exchange effects (millions of
dollars):
1997 1996 1995
---- ---- ----
Operating income on a 1995 exchange rate basis $ 5 $ 7 $ 13
Effect of exchange rate changes 3 (2) --
---- ---- ----
Operating income as reported 8 5 13
Gain (loss) from foreign exchange contracts (3) 6 1
---- ---- ----
Contribution from New Zealand operations $ 5 $ 11 $ 14
==== ==== ====
17. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED)
(thousands of dollars, except per share amounts)
Quarter Ended
------------------------------------------------------------- Total
March 31 June 30 Sept. 30 Dec. 31 Year
----------- ----------- ----------- ---------- -----------
1997
Sales $ 260,138 $ 290,073 $ 266,853 $ 287,164 $ 1,104,228
Operating income 40,473 41,075 41,894 42,688 166,130
Net income 18,396 19,761 23,241 25,921 87,319
Basic EPS .63 .68 .81 .91 3.03
Diluted EPS .62 .67 .79 .89 2.97
1996
Sales $ 293,980 $ 296,667 $ 285,104 $ 302,289 $ 1,178,040
Operating income (loss) 59,892 32,949 31,049 (89,973)a 33,917
Net income (loss) 31,477 15,404 15,568 (160,848)b (98,399)
Basic EPS 1.06 .52 .53 (5.39)b (3.28)
Diluted EPS 1.05 .51 .52 (5.39)b (3.28)
a Includes a pretax charge of $125 million for dispositions, primarily for
the closure of the Port Angeles pulp mill. See Note 6.
b Includes a charge of $79 million after-tax, or $2.63 per share, primarily
for the closure of the Port Angeles pulp mill and a charge of $98 million
after-tax, or $3.28 per share, to implement AICPA Statement of Position
96-1 related to future environmental monitoring costs. See Note 6.
F-18
39
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 20, 1998 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, Chief
------------------------------- Executive Officer and Director
Ronald M. Gross
(Principal Executive Officer)
GERALD J. POLLACK Senior Vice President and March 20, 1998
------------------------------- Chief Financial Officer
Gerald J. Pollack
(Principal Financial Officer)
KENNETH P. JANETTE Vice President and Corporate March 20, 1998
------------------------------- Controller
Kenneth P. Janette
(Principal Accounting Officer)
* President, Chief Operating
------------------------------- Officer and Director
W. Lee Nutter
* Director
-------------------------------
Rand V. Araskog
* Director
-------------------------------
Donald W. Griffin
* Director
-------------------------------
Paul G. Kirk, Jr.
* Director
-------------------------------
Katherine D. Ortega
* Director
-------------------------------
Burnell R. Roberts
* Director
-------------------------------
Carl S. Sloane
* Director
-------------------------------
Nicholas L. Trivisonno
* Director
-------------------------------
Gordon I. Ulmer
*By GERALD J. POLLACK March 20, 1998
---------------------------
Attorney-In-Fact
A
40
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
2.1 Distribution agreement between ITT Incorporated by reference to Exhibit
Corporation and Rayonier Inc. 2.1 to the Registrant's December 31,
1993 Form 10-K
3.1 Amended and Restated Articles of Incorporation Incorporated by reference to Exhibit
4(a) to the Registrant's Registration
Statement on Form S-8 (Registration No.
33-52437)
3.2 By-Laws Incorporated by reference to Exhibit
3.2 to the Registrant's December 31,
1995 Form 10-K
4.1 Indenture dated as of September 1, 1992 Incorporated by reference to Exhibit
between the Company and Bankers Trust 4.1 to the Registrant's December 31,
Company, as Trustee, with respect to certain 1993 Form 10-K
debt securities of the Company
4.2 First Supplemental Indenture dated as of Incorporated by reference to Exhibit
December 13, 1993 4.2 to the Registrant's December 31,
1993 Form 10-K
4.3 $100 million 364-day Revolving Credit Incorporated by reference to Exhibit
Agreement dated as of April 14, 1995 among 4.1 to the Registrant's March 31, 1995
Rayonier Inc. as Borrower and the banks named Form 10-Q
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 dated Incorporated by reference to Exhibit
as of April 14, 1995 among Rayonier Inc. as 4.2 to the Registrant's March 31, 1995
Borrower and the banks named therein as Form 10-Q
Banks, Citibank, N.A. as Administrative Agent
and Citicorp Securities, Inc. and the
Toronto-Dominion Bank as Arrangers
4.5 Amendment No.1, dated as of June 16, 1995 to Incorporated by reference to Exhibit
the $100 million 364-day Revolving Credit 4.1 to the Registrant's June 30, 1996
Agreement dated as of April 14, 1995 among 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
4.6 Amendment No. 2, dated as of April 12, 1996 Incorporated by reference to Exhibit
to the $100 million 364-day Revolving Credit 4.2 to the Registrant's June 30, 1996
Agreement dated as of April 14, 1995 among 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
B
41
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
4.7 Amendment No. 1, dated as of June 16, 1995 to Incorporated by reference to Exhibit
the $200 million Revolving Credit Agreement 4.3 to the Registrant's June 30, 1996
dated as of April 14, 1995 among Rayonier 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
4.8 Amendment No. 2, dated as of April 12, 1996 Incorporated by reference to Exhibit
to the $200 million Revolving Credit 4.4 to the Registrant's June 30, 1996
Agreement dated as of April 14, 1995 among 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
4.9 Amended and Restated Revolving Credit Incorporated by reference to Exhibit
Agreement dated as of April 11, 1997, for the 4.1 to the Registrant's March 31, 1997
$200 million Revolving Credit Agreement dated Form 10-Q
as of April 14, 1995 as amended as of June
16, 1995 and as of April 12, 1996 among
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
4.10 Other instruments defining the rights of Not required to be filed. The
security holders, including indentures Registrant 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 Rayonier 1994 Incentive Stock Plan Filed herewith
10.2 Rayonier Supplemental Senior Executive Filed herewith
Severance Pay Plan
10.3 Rayonier Investment and Savings Plan for Filed herewith
Salaried Employees
10.4 Rayonier Salaried Employees Retirement Plan Filed herewith
C
42
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
10.5 Form of Indemnification Agreement between Incorporated by reference to Exhibit
Rayonier Inc. and its Directors and Officers 10.9 to the Registrant's December 31,
1993 Form 10-K
10.6 Rayonier Inc. Excess Benefit Plan Incorporated by reference to Exhibit
10.10 to the Registrant's December 31,
1993 Form 10-K
10.7 Amendment to Rayonier Inc. Excess Benefit Filed herewith
Plan dated August 18, 1997
10.8 Rayonier Inc. Excess Savings and Deferred Filed herewith
Compensation Plan
10.9 Form of Rayonier Inc. Excess Savings and Incorporated by reference to Exhibit
Deferred Compensation Plan Agreements 10.13 to the Registrant's December 31,
1995 Form 10-K
10.10 Form of Indemnification Agreement between Incorporated by reference to Exhibit
Registrant and directors of Rayonier Forest 10.1 to the Registrant's March 31, 1994
Resources Company, its wholly owned Form 10-Q
subsidiary which is Managing General Partner
of Rayonier Timberlands, L.P., who are not
also directors of Registrant
10.11 Description of Rayonier 1994 Incentive Stock Incorporated by reference to Exhibit
Plan Contingent Performance Share Awards 10.1 to the Registrant's June 30, 1994
Form 10-Q
10.12 Form of Rayonier 1994 Incentive Stock Plan Incorporated by reference to Exhibit
Contingent Performance Share Award Agreement 10.1 to the Registrant's June 30, 1994
Form 10-Q
10.13 Form of Rayonier 1994 Incentive Stock Plan Incorporated by reference to Exhibit
Restricted Share Award Agreement 10.17 to the Registrant's December 31,
1995 Form 10-K
10.14 Form of Rayonier 1994 Incentive Stock Incorporated by reference to Exhibit
Non-qualified Stock Option Award Agreement 10.18 to the Registrant's December 31,
1995 Form 10-K
10.15 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)
10.16 Form of Rayonier Substitute Stock Option Incorporated by reference to Exhibit
Award Agreements 10.20 to the Registrant's December 31,
1995 Form 10-K
10.17 Split-Dollar Life Insurance Agreement dated Incorporated by reference to Exhibit
June 22, 1994 between Rayonier Inc. and 10.2 to the Registrant's June 30, 1994
Ronald M. Gross Form 10-Q
10.18 Amendment to Split-Dollar Life Insurance Filed herewith
Agreement, dated July 22, 1997
D
43
EXHIBIT INDEX
Exhibit No. Description Location
----------- ----------- --------
10.19 Deferred Compensation / Supplemental Incorporated by reference to Exhibit
Retirement Agreement dated June 28, 1994 10.3 to the Registrant's June 30, 1994
between Rayonier Inc. and Ronald M. Gross Form 10-Q
10.20 Amendment to Deferred Compensation / Filed herewith
Supplemental Retirement Agreement, dated July
22, 1997
10.21 Other material contracts None
11 Statement re computation of per share earnings Not required to be filed
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 submitted None
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 state Not applicable
insurance regulatory authorities
99 Additional exhibits None
E