10-Q 1 rayonier201110q3q2011.htm FORM 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011
OR

o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

| For the transition period from to

Commission File Number 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
1301 RIVERPLACE BOULEVARD
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-9100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x |  | Accelerated filer o
Non-accelerated filer o |  | Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
As of October 19, 2011, there were outstanding 121,829,444 Common Shares of the registrant.

Table of Contents

Table of Contents
TABLE OF CONTENTS

Item |  |  | Page
|  | PART I - FINANCIAL INFORMATION |
1. |  | Financial Statements (unaudited) | 1
|  | Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2011 and 2010 | 1
|  | Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 | 2
|  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 | 3
|  | Notes to Condensed Consolidated Financial Statements | 4
2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations | 21
3. |  | Quantitative and Qualitative Disclosures about Market Risk | 32
4. |  | Controls and Procedures | 32
|  | PART II - OTHER INFORMATION |
6. |  | Exhibits | 33
|  | Signature | 34

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
SALES | $ | 385,091 |  |  | $ | 377,515 |  |  | $ | 1,100,218 |  |  | $ | 999,925 |
Costs and Expenses |  |  |  |  |  |  |
Cost of sales | 266,184 |  |  | 269,203 |  |  | 786,467 |  |  | 744,996 |
Selling and general expenses | 15,762 |  |  | 17,125 |  |  | 48,187 |  |  | 49,264 |
Other operating income, net | (4,171 | ) |  | (792 | ) |  | (5,580 | ) |  | (6,620 | )
| 277,775 |  |  | 285,536 |  |  | 829,074 |  |  | 787,640 |
Equity in income of New Zealand joint venture | 994 |  |  | 103 |  |  | 3,817 |  |  | 634 |
OPERATING INCOME BEFORE GAIN ON SALE OF A PORTION |  |  |  |  |  |  |
OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE | 108,310 |  |  | 92,082 |  |  | 274,961 |  |  | 212,919 |
Gain on sale of a portion of the interest in the New Zealand joint venture (Note 5) | — |  |  | — |  |  | — |  |  | 12,367 |
OPERATING INCOME | 108,310 |  |  | 92,082 |  |  | 274,961 |  |  | 225,286 |
Interest expense | (12,356 | ) |  | (12,943 | ) |  | (38,300 | ) |  | (37,680 | )
Interest and miscellaneous income, net | 331 |  |  | 345 |  |  | 935 |  |  | 943 |
INCOME BEFORE INCOME TAXES | 96,285 |  |  | 79,484 |  |  | 237,596 |  |  | 188,549 |
Income tax benefit (expense) | 8,624 |  |  | (16,580 | ) |  | (17,822 | ) |  | (30,134 | )
NET INCOME | 104,909 |  |  | 62,904 |  |  | 219,774 |  |  | 158,415 |
OTHER COMPREHENSIVE INCOME (LOSS) |  |  |  |  |  |  |
Foreign currency translation adjustment | 3,584 |  |  | 3,198 |  |  | 11,314 |  |  | (64 | )
Joint venture cash flow hedges | (630 | ) |  | (104 | ) |  | (498 | ) |  | 922 |
Amortization of pension and postretirement benefit costs, net of income |  |  |  |  |  |  |
tax expense (benefit) of $1,017 and $661, and $2,871 and ($1,705) | 2,261 |  |  | 1,210 |  |  | 6,449 |  |  | 5,849 |
COMPREHENSIVE INCOME | $ | 110,124 |  |  | $ | 67,208 |  |  | $ | 237,039 |  |  | $ | 165,122 |
EARNINGS PER COMMON SHARE (NOTE 2) |  |  |  |  |  |  |
Basic earnings per share | $ | 0.86 |  |  | $ | 0.52 |  |  | $ | 1.81 |  |  | $ | 1.32 |
Diluted earnings per share | $ | 0.84 |  |  | $ | 0.51 |  |  | $ | 1.75 |  |  | $ | 1.30 |
Dividends per share | $ | 0.40 |  |  | $ | 0.33 |  |  | $ | 1.12 |  |  | $ | 1.00 |

See Notes to Condensed Consolidated Financial Statements.
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RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)

| September 30, 2011 |  | December 31, 2010
ASSETS
CURRENT ASSETS |  |  |
Cash and cash equivalents | $ | 362,285 |  |  | $ | 349,463 |
Accounts receivable, less allowance for doubtful accounts of $388 and $387 | 106,937 |  |  | 82,640 |
Inventory |  |  |
Finished goods | 87,301 |  |  | 84,013 |
Work in progress | 8,353 |  |  | 6,041 |
Raw materials | 16,170 |  |  | 17,517 |
Manufacturing and maintenance supplies | 2,290 |  |  | 2,464 |
Total inventory | 114,114 |  |  | 110,035 |
Income tax receivable | 1,624 |  |  | 21,734 |
Prepaid and other current assets | 63,458 |  |  | 45,314 |
Total Current Assets | 648,418 |  |  | 609,186 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | 1,192,356 |  |  | 1,137,931 |
PROPERTY, PLANT AND EQUIPMENT |  |  |
Land | 26,345 |  |  | 24,776 |
Buildings | 131,406 |  |  | 129,913 |
Machinery and equipment | 1,343,931 |  |  | 1,318,055 |
Construction in progress | 63,405 |  |  | 33,920 |
Total property, plant and equipment, gross | 1,565,087 |  |  | 1,506,664 |
Less—accumulated depreciation | (1,144,479 | ) |  | (1,121,360 | )
Total property, plant and equipment, net | 420,608 |  |  | 385,304 |
INVESTMENT IN JOINT VENTURE (NOTE 5) | 80,281 |  |  | 68,483 |
OTHER ASSETS | 153,058 |  |  | 162,749 |
TOTAL ASSETS | $ | 2,494,721 |  |  | $ | 2,363,653 |
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES |  |  |
Accounts payable | $ | 68,495 |  |  | $ | 57,985 |
Current maturities of long-term debt | 116,167 |  |  | 93,057 |
Accrued taxes | 22,894 |  |  | 10,337 |
Accrued payroll and benefits | 24,719 |  |  | 25,466 |
Accrued interest | 11,942 |  |  | 6,206 |
Accrued customer incentives | 9,265 |  |  | 9,759 |
Other current liabilities | 35,637 |  |  | 30,638 |
Current liabilities for dispositions and discontinued operations (Note 10) | 11,090 |  |  | 11,500 |
TOTAL CURRENT LIABILITIES | 300,209 |  |  | 244,948 |
LONG-TERM DEBT | 658,464 |  |  | 675,103 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED |  |  |
OPERATIONS (Note 10) | 75,213 |  |  | 81,660 |
PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 12) | 65,512 |  |  | 66,335 |
OTHER NON-CURRENT LIABILITIES | 27,292 |  |  | 44,025 |
COMMITMENTS AND CONTINGENCIES (Note 9 and 11) |  |  |
SHAREHOLDERS’ EQUITY |  |  |
Common Shares, 240,000,000 shares authorized, 121,827,626 and |  |  |
121,023,140 shares issued and outstanding | 619,965 |  |  | 602,882 |
Retained earnings | 799,159 |  |  | 717,058 |
Accumulated other comprehensive loss | (51,093 | ) |  | (68,358 | )
TOTAL SHAREHOLDERS' EQUITY | 1,368,031 |  |  | 1,251,582 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 2,494,721 |  |  | $ | 2,363,653 |

See Notes to Condensed Consolidated Financial Statements.
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RAYONIER INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

| Nine Months Ended September 30,
| 2011 |  | 2010
OPERATING ACTIVITIES |  |  |
Net income | $ | 219,774 |  |  | $ | 158,415 |
Adjustments to reconcile net income to cash provided by operating activities: |  |  |
Depreciation, depletion and amortization | 101,758 |  |  | 115,687 |
Non-cash cost of real estate sold | 3,108 |  |  | 6,531 |
Stock-based incentive compensation expense | 11,793 |  |  | 11,610 |
Gain on sale of a portion of interest in the New Zealand joint venture | — |  |  | (11,545 | )
Amortization of convertible debt discount | 6,471 |  |  | 6,103 |
Deferred income taxes | (5,967 | ) |  | 14,871 |
Excess tax benefits on stock-based compensation | (4,951 | ) |  | (5,071 | )
Other | 9,094 |  |  | 4,571 |
Changes in operating assets and liabilities: |  |  |
Receivables | (24,071 | ) |  | (10,756 | )
Inventories | (8,435 | ) |  | (3,481 | )
Accounts payable | 6,346 |  |  | (8,993 | )
Income tax receivable | 20,110 |  |  | 190,997 |
Other current assets | (11,244 | ) |  | (6,032 | )
Accrued liabilities | 26,990 |  |  | 16,476 |
Other assets | 1,168 |  |  | 629 |
Other non-current liabilities | (18,759 | ) |  | (321 | )
Expenditures for dispositions and discontinued operations | (6,915 | ) |  | (6,484 | )
CASH PROVIDED BY OPERATING ACTIVITIES | 326,270 |  |  | 473,207 |
INVESTING ACTIVITIES |  |  |
Capital expenditures | (87,156 | ) |  | (95,614 | )
Purchase of timberlands | (94,162 | ) |  | — |
Jesup mill cellulose specialties expansion | (14,567 | ) |  | — |
Change in restricted cash | 8,323 |  |  | (13,209 | )
Other | 7,021 |  |  | 6,211 |
CASH USED FOR INVESTING ACTIVITIES | (180,541 | ) |  | (102,612 | )
FINANCING ACTIVITIES |  |  |
Issuance of debt | 180,000 |  |  | 157,000 |
Repayment of debt | (180,000 | ) |  | (96,650 | )
Dividends paid | (136,563 | ) |  | (120,156 | )
Proceeds from the issuance of common shares | 8,248 |  |  | 21,532 |
Excess tax benefits on stock-based compensation | 4,951 |  |  | 5,071 |
Debt issuance costs | (2,027 | ) |  | (537 | )
Repurchase of common shares | (7,909 | ) |  | (6,028 | )
CASH USED FOR FINANCING ACTIVITIES | (133,300 | ) |  | (39,768 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 393 |  |  | (126 | )
CASH AND CASH EQUIVALENTS |  |  |
Change in cash and cash equivalents | 12,822 |  |  | 330,701 |
Balance, beginning of year | 349,463 |  |  | 74,964 |
Balance, end of period | $ | 362,285 |  |  | $ | 405,665 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |  |  |
Cash paid during the period: |  |  |
Interest | $ | 23,706 |  |  | $ | 24,499 |
Income taxes | $ | 4,992 |  |  | $ | 4,538 |
Non-cash investing activity: |  |  |
Capital assets purchased on account | $ | 16,504 |  |  | $ | 9,800 |

See Notes to Condensed Consolidated Financial Statements.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

1. | BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS

Basis of Presentation
The unaudited condensed consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries ("Rayonier" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain information in the financial statements of the Company's Annual Report on Form 10-K has been condensed. In the opinion of management, these financial statements and notes reflect all adjustments necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC.
Subsequent Events
The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued, and no subsequent events were identified that warranted disclosure.
New or Recently Adopted Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement - referred to as the statement of comprehensive income - or in two separate, but consecutive, statements. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts - net income and other comprehensive income, would need to be displayed under either alternative. The statements would need to be presented with equal prominence as the other primary financial statements. The standard is effective for Rayonier's first quarter 2012 filing. Since Rayonier reports a condensed consolidated statement of income and comprehensive income as its first financial statement each quarter, this new guidance will have no effect.

2. | EARNINGS PER COMMON SHARE

On July 22, 2011, the Board of Directors authorized a three-for-two stock split in the form of a stock dividend. The additional shares were distributed on August 24, 2011 to shareholders of record on August 10, 2011. The impact of the stock split is reflected for all periods presented in the following table which provides details of the calculations of basic and diluted earnings per common share:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
Net income | $ | 104,909 |  |  | $ | 62,904 |  |  | $ | 219,774 |  |  | $ | 158,415 |
Shares used for determining basic earnings per common share | 121,790,059 |  |  | 120,394,172 |  |  | 121,665,644 |  |  | 120,057,048 |
Dilutive effect of: |  |  |  |  |  |  |
Stock options | 689,643 |  |  | 579,611 |  |  | 716,095 |  |  | 575,294 |
Performance and restricted shares | 1,179,047 |  |  | 1,232,342 |  |  | 1,121,909 |  |  | 1,144,926 |
Assumed conversion of Senior Exchangeable Notes (a) | 1,823,600 |  |  | — |  |  | 1,883,270 |  |  | — |
Assumed conversion of warrants | 117,260 |  |  | — |  |  | 143,182 |  |  | — |
Shares used for determining diluted earnings per common share | 125,599,609 |  |  | 122,206,125 |  |  | 125,530,100 |  |  | 121,777,268 |
Basic earnings per common share | $ | 0.86 |  |  | $ | 0.52 |  |  | $ | 1.81 |  |  | $ | 1.32 |
Diluted earnings per common share | $ | 0.84 |  |  | $ | 0.51 |  |  | $ | 1.75 |  |  | $ | 1.30 |

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

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
Anti-dilutive shares excluded from the computations of |  |  |  |  |  |  |
diluted earnings per share: |  |  |  |  |  |  |
Stock options, performance and restricted shares | 142,135 |  |  | 179,119 |  |  | 198,594 |  |  | 769,699 |
Assumed conversion of exchangeable note hedges (a) | 1,823,600 |  |  | — |  |  | 1,883,270 |  |  | — |
Total | 1,965,735 |  |  | 179,119 |  |  | 2,081,864 |  |  | 769,699 |

(a) Upon maturity of the Senior Exchangeable Notes (the "Notes"), Rayonier will not issue additional shares for the Notes due to the offsetting exchangeable note hedges (the "hedges"). However, accounting guidance under Accounting Standards Codification 260, Earnings Per Share requires the assumed conversion of the Notes to be included in dilutive shares, while the assumed conversion of the hedges are excluded since they are anti-dilutive. For additional information on the potential dilutive impact of the Senior Exchangeable Notes, warrants and exchangeable note hedges, see Note 11 - Debt in the 2010 Annual Report on Form 10-K.

3. | INCOME TAXES

Rayonier is a real estate investment trust ("REIT"). In general, only the taxable REIT subsidiaries, whose businesses include the Company's non-REIT qualified activities, are subject to corporate income taxes. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2013 (for 2011 the tax rate is zero). Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries' income and certain property sales.
Unrecognized Tax Benefits
During the third quarter of 2011, the Company received a final examination report from the U.S. Internal Revenue Service ("IRS") regarding its Rayonier TRS Holdings Inc. ("TRS") 2009 tax return. As a result, Rayonier reversed the uncertain tax liability recorded in 2009 relating to the taxability of the alternative fuel mixture credit ("AFMC") and recognized a $16 million tax benefit in the third quarter of 2011.
Cellulosic Biofuel Producer Credit
The IRS allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. In the second quarter of 2011, management approved an exchange of alternative fuel (black liquor) gallons previously claimed under the AFMC for the cellulosic biofuel producer credit ("CBPC"). The net tax benefits from the exchange for the three and nine months ended September 30, 2011 were $2.0 million and $6.1 million, respectively.
For additional information, see Note 3 - Alternative Fuel Mixture Credit ("AFMC") and Cellulosic Biofuel Producer Credit ("CBPC") and Note 8 - Income Taxes in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.
Effective Tax Rate
The Company's effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. The effective tax rate for the quarter was a 9.0 percent benefit compared to a 20.9 percent expense in the prior year period. Year-to-date, the 2011 effective tax rate was a 7.5 percent expense compared to a 16.0 percent expense in 2010. The 2011 periods benefited from the reversal of the reserve related to the taxability of the AFMC, the exchange for the CBPC and a $9.3 million benefit associated with the structuring of a transfer of higher and better use properties to a taxable REIT subsidiary from the REIT.

4. | RESTRICTED DEPOSITS

In order to qualify for like-kind exchange ("LKE") treatment, the proceeds from real estate sales must be deposited with a third-party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event that the LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of September 30, 2011 and December 31, 2010, the Company had $0 and $8.3 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

5. | JOINT VENTURE INVESTMENT

The Company holds a 26 percent interest in Matariki Forestry Group ("Matariki"), a joint venture ("JV") that owns or leases approximately 0.3 million acres of New Zealand timberlands. In addition to the investment, Rayonier New Zealand Limited, a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the JV forests and operates a log trading business.
In February 2010, the JV sold a 35 percent interest to a new investor for NZ$167 million. Matariki issued new shares to the investor and used all the proceeds to pay down a portion of its outstanding NZ$367 million debt. Upon closing, Rayonier's ownership interest in Matariki declined from 40 percent to 26 percent. As a result of this transaction, results for the nine months ended September 30, 2010 include a gain of $11.5 million, net of $0.9 million in tax, or $0.09 per diluted share.

6. | SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the nine months ended September 30, 2011 and the year ended December 31, 2010 is shown below (share amounts not in thousands):

| Common Shares |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Shareholders’ Equity
| Shares (a) |  | Amount |
Balance, December 31, 2009 | 119,312,961 |  |  | $ | 561,962 |  |  | $ | 663,986 |  |  | $ | (79,742 | ) |  | $ | 1,146,206 |
Net income | — |  |  | — |  |  | 217,586 |  |  | — |  |  | 217,586 |
Dividends ($1.36 per share) | — |  |  | — |  |  | (164,514 | ) |  | — |  |  | (164,514 | )
Issuance of shares under incentive stock plans | 1,914,341 |  |  | 26,314 |  |  | — |  |  | — |  |  | 26,314 |
Stock-based compensation | — |  |  | 15,223 |  |  | — |  |  | — |  |  | 15,223 |
Excess tax benefit on stock-based compensation | — |  |  | 5,411 |  |  | — |  |  | — |  |  | 5,411 |
Repurchase of common shares | (204,162 | ) |  | (6,028 | ) |  | — |  |  | — |  |  | (6,028 | )
Net gain from pension and postretirement plans | — |  |  | — |  |  | — |  |  | 6,385 |  |  | 6,385 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | 4,162 |  |  | 4,162 |
Joint venture cash flow hedges | — |  |  | — |  |  | — |  |  | 837 |  |  | 837 |
Balance, December 31, 2010 | 121,023,140 |  |  | $ | 602,882 |  |  | $ | 717,058 |  |  | $ | (68,358 | ) |  | $ | 1,251,582 |
Net income | — |  |  | — |  |  | 219,774 |  |  | — |  |  | 219,774 |
Dividends ($1.12 per share) | — |  |  | — |  |  | (137,673 | ) |  | — |  |  | (137,673 | )
Issuance of shares under incentive stock plans | 1,013,180 |  |  | 8,248 |  |  | — |  |  | — |  |  | 8,248 |
Stock-based compensation | — |  |  | 11,793 |  |  | — |  |  | — |  |  | 11,793 |
Excess tax benefit on stock-based compensation | — |  |  | 4,951 |  |  | — |  |  | — |  |  | 4,951 |
Repurchase of common shares | (208,694 | ) |  | (7,909 | ) |  | — |  |  | — |  |  | (7,909 | )
Amortization of pension and postretirement plans | — |  |  | — |  |  | — |  |  | 6,449 |  |  | 6,449 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | 11,314 |  |  | 11,314 |
Joint venture cash flow hedges | — |  |  | — |  |  | — |  |  | (498 | ) |  | (498 | )
Balance, September 30, 2011 | 121,827,626 |  |  | $ | 619,965 |  |  | $ | 799,159 |  |  | $ | (51,093 | ) |  | $ | 1,368,031 |

(a) The impact of the August 2011 three-for-two stock split is reflected for all periods presented. See Note 2 - Earnings Per Common Share for additional information.

7. | SEGMENT AND GEOGRAPHICAL INFORMATION

Effective first quarter 2011, the Company renamed its Timber segment, Forest Resources. All prior period amounts previously reported under the Timber segment are now reported under the Forest Resources segment.
Rayonier operates in four reportable business segments: Forest Resources, Real Estate, Performance Fibers, and Wood Products. Forest Resources sales include all activities that relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are reported in "Other Operations." Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on the operating income of the segments.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
Operating income (loss) as presented in the Condensed Consolidated Statements of Income and Comprehensive Income is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations.
Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:

| September 30, |  | December 31,
ASSETS | 2011 |  | 2010
Forest Resources | $ | 1,342,022 |  |  | $ | 1,259,925 |
Real Estate | 82,313 |  |  | 85,525 |
Performance Fibers | 617,649 |  |  | 550,875 |
Wood Products | 20,292 |  |  | 19,544 |
Other Operations | 22,980 |  |  | 25,583 |
Corporate and other | 409,465 |  |  | 422,201 |
Total | $ | 2,494,721 |  |  | $ | 2,363,653 |

| Three Months Ended September 30, |  | Nine Months Ended September 30,
SALES | 2011 |  | 2010 |  | 2011 |  | 2010
Forest Resources | $ | 57,265 |  |  | $ | 47,343 |  |  | $ | 162,482 |  |  | $ | 143,368 |
Real Estate | 32,177 |  |  | 45,162 |  |  | 57,945 |  |  | 90,891 |
Performance Fibers | 255,457 |  |  | 246,314 |  |  | 739,426 |  |  | 648,032 |
Wood Products | 16,492 |  |  | 14,652 |  |  | 50,239 |  |  | 52,157 |
Other Operations | 25,950 |  |  | 25,449 |  |  | 94,869 |  |  | 72,803 |
Intersegment Eliminations (a) | (2,250 | ) |  | (1,405 | ) |  | (4,743 | ) |  | (7,326 | )
Total | $ | 385,091 |  |  | $ | 377,515 |  |  | $ | 1,100,218 |  |  | $ | 999,925 |

(a) | Intersegment eliminations primarily reflect sales from our Forest Resources segment to our Performance Fibers segment.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
OPERATING INCOME (LOSS) | 2011 |  | 2010 |  | 2011 |  | 2010
Forest Resources | $ | 10,792 |  |  | $ | 9,151 |  |  | $ | 33,681 |  |  | $ | 26,023 |
Real Estate | 28,077 |  |  | 30,788 |  |  | 40,458 |  |  | 52,325 |
Performance Fibers | 74,897 |  |  | 62,311 |  |  | 221,709 |  |  | 152,158 |
Wood Products | (740 | ) |  | (1,368 | ) |  | (1,274 | ) |  | 2,943 |
Other Operations | 1,122 |  |  | (798 | ) |  | 955 |  |  | 538 |
Corporate and other (b) | (5,838 | ) |  | (8,002 | ) |  | (20,568 | ) |  | (8,701 | )
Total | $ | 108,310 |  |  | $ | 92,082 |  |  | $ | 274,961 |  |  | $ | 225,286 |

(b) | Nine months ended September 30, 2010 include a $12.4 million gain from the sale of a portion of the Company's interest in its New Zealand JV. See Note 5 — Joint Venture Investment for additional information.

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

| Three Months Ended September 30, |  | Nine Months Ended September 30,
DEPRECIATION, DEPLETION AND AMORTIZATION | 2011 |  | 2010 |  | 2011 |  | 2010
Forest Resources | $ | 16,614 |  |  | $ | 14,813 |  |  | $ | 47,866 |  |  | $ | 48,819 |
Real Estate | 5,677 |  |  | 9,284 |  |  | 10,598 |  |  | 21,286 |
Performance Fibers | 15,592 |  |  | 13,922 |  |  | 40,089 |  |  | 41,929 |
Wood Products | 689 |  |  | 936 |  |  | 2,344 |  |  | 3,080 |
Corporate and other | 323 |  |  | 210 |  |  | 861 |  |  | 573 |
Total | $ | 38,895 |  |  | $ | 39,165 |  |  | $ | 101,758 |  |  | $ | 115,687 |

8. | FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at September 30, 2011 and December 31, 2010, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:

|  | September 30, 2011 |  | December 31, 2010
Asset (liability) |  | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Cash and cash equivalents | $ | 362,285 |  |  | $ | 362,285 |  |  | $ | 349,463 |  |  | $ | 349,463 |
Short-term debt |  | (116,167 | ) |  | (117,074 | ) |  | (93,057 | ) |  | (98,042 | )
Long-term debt |  | (658,464 | ) |  | (692,754 | ) |  | (675,103 | ) |  | (783,080 | )

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

Asset |  | Carrying Value at September 30, 2011 |  | Level 2 |  | Carrying Value at December 31, 2010 |  | Level 2
Investment in special-purpose entity |  | $ | 2,879 |  |  | $ | 2,879 |  |  | $ | 2,879 |  |  | $ | 2,879 |

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

9. | GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of September 30, 2011, the following financial guarantees were outstanding:

Financial Commitments |  | Maximum Potential Payment |  | Carrying Amount of Liability
Standby letters of credit (a) | $ | 43,807 |  |  | $ | 38,110 |
Guarantees (b) |  | 2,555 |  |  | 43 |
Surety bonds (c) |  | 12,447 |  |  | 1,536 |
Total financial commitments | $ | 58,809 |  |  | $ | 39,689 |

(a) | Approximately $39 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit will expire at various dates during 2011 and 2012 and will be renewed as required.

(b) | In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.6 million of obligations of a special-purpose entity that was established to complete the monetization. At September 30, 2011, the Company has a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.

(c) | Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates during 2011, 2012 and 2014 and are expected to be renewed as required.

10. | LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

An analysis of the liabilities for dispositions and discontinued operations follows:

| September 30, |  | December 31, |
| 2011 |  | 2010 |
Balance, beginning of period | $ | 93,160 |  |  | $ | 98,591 |  |
Expenditures charged to liabilities | (6,915 | ) |  | (8,632 | ) |
Increase to liabilities | 58 |  |  | 3,201 |  |
Balance, end of period | 86,303 |  |  | 93,160 |  |
Less: Current portion | (11,090 | ) |  | (11,500 | ) |
Non-current portion | $ | 75,213 |  |  | $ | 81,660 |  |

The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 30, 2011, this amount could range up to $40 million, allocable over several of the applicable sites, and arises from uncertainty over the availability, feasibility or effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies and the
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
Subject to the factors described in Note 14 - Liabilities for Dispositions and Discontinued Operations in the 2010 Annual Report on Form 10-K, the Company believes established liabilities are sufficient for costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions for these sites vary, but include, among others, on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.

11. | CONTINGENCIES

Rayonier is engaged in various legal actions, including certain environmental proceedings. The Company has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flow.
For additional information, see Note 14 — Liabilities for Dispositions and Discontinued Operations in the 2010 Annual Report on Form 10-K.

12. | EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering a majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. Effective March 2011, all of these plans were closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recognized during the stated periods are shown in the following table:

| Pension | Postretirement
| Three Months Ended September 30, |  | Three Months Ended September 30, |
| 2011 |  | 2010 |  | 2011 |  | 2010 |
Components of Net Periodic Benefit Cost |  |  |  |  |  |  |  |
Service cost | $ | 1,695 |  |  | $ | 1,549 |  |  | $ | 99 |  |  | $ | 148 |  |
Interest cost | 4,522 |  |  | 4,435 |  |  | 257 |  |  | 258 |  |
Expected return on plan assets | (6,455 | ) |  | (5,412 | ) |  | — |  |  | — |  |
Amortization of prior service cost | 340 |  |  | 414 |  |  | 49 |  |  | 21 |  |
Amortization of plan amendment | — |  |  | — |  |  | — |  |  | (637 | ) |
Amortization of losses | 2,593 |  |  | 1,614 |  |  | 296 |  |  | 459 |  |
Net periodic benefit cost | $ | 2,695 |  |  | $ | 2,600 |  |  | $ | 701 |  |  | $ | 249 |  |

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

| Pension | Postretirement
| Nine Months Ended September 30, |  | Nine Months Ended September 30, |
| 2011 |  | 2010 |  | 2011 |  | 2010 |
Components of Net Periodic Benefit Cost |  |  |  |  |  |  |  |
Service cost | $ | 5,086 |  |  | $ | 4,647 |  |  | $ | 463 |  |  | $ | 440 |  |
Interest cost | 13,566 |  |  | 13,305 |  |  | 729 |  |  | 772 |  |
Expected return on plan assets | (19,366 | ) |  | (16,238 | ) |  | — |  |  | — |  |
Amortization of prior service cost | 1,020 |  |  | 1,243 |  |  | 93 |  |  | 65 |  |
Amortization of plan amendment | — |  |  | — |  |  | — |  |  | (5,421 | ) |
Amortization of losses | 7,779 |  |  | 4,842 |  |  | 428 |  |  | 3,415 |  |
Net periodic benefit cost | $ | 8,085 |  |  | $ | 7,799 |  |  | $ | 1,713 |  |  | $ | (729 | ) |

The Company made no discretionary contributions to the pension plans during the nine months ended September 30, 2011. The Company has no mandatory pension contributions for 2011 and does not expect to make any discretionary contributions.

13. | DEBT

In April 2011, the Company entered into a five year $300 million unsecured revolving credit facility, replacing the previous $250 million facility which was scheduled to expire in August 2011. The new facility has a borrowing rate of LIBOR plus 105 basis points plus a facility fee of 20 basis points and expires in April 2016. In August 2011, the Company increased the revolving credit facility to $450 million from $300 million. At September 30, 2011, the Company had $370 million of available borrowings under this facility.
In March 2011, TRS, a wholly-owned subsidiary of Rayonier, repaid a $75 million term note due in 2015. There were no other significant changes to the Company's outstanding debt as reported in Note 11 - Debt of the Company's 2010 Annual Report on 10-K.

14. | ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated Other Comprehensive Loss was comprised of the following:

| September 30, 2011 |  | December 31, 2010
Foreign currency translation adjustments (a) | $ | 42,245 |  |  | $ | 30,931 |
Joint venture cash flow hedges | (1,966 | ) |  | (1,468 | )
Unrecognized components of employee benefit plans, net of tax | (91,372 | ) |  | (97,821 | )
Total | $ | (51,093 | ) |  | $ | (68,358 | )

(a) During the nine months ended September 30, 2011, the increase in net foreign currency translation adjustments was due to the strengthening of the New Zealand dollar against the U.S. dollar.

15. | CONSOLIDATING FINANCIAL STATEMENTS

In October 2007, TRS issued $300 million of 3.75% Senior Exchangeable Notes due 2012, and in August 2009 TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015. The notes for both transactions are non-callable and are guaranteed by Rayonier Inc. as the Parent Guarantor and Rayonier Operating Company LLC ("ROC") as the Subsidiary Guarantor. In connection with these exchangeable notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation, and the allocation of certain expenses of Rayonier Inc. incurred for the benefit of its subsidiaries.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
Reclassifications
In fourth quarter 2010, the Company determined that certain amounts had been incorrectly allocated between the entities presented. See Note 21 - Consolidating Financial Statements in the Company's 2010 Annual Report on Form 10-K for additional information. This resulted in (1) an understatement of interest expense of $5.3 million and $15.6 million for the three and nine months ended September 30, 2010, respectively, for TRS (Issuer) and an overstatement for the same amount for TRS non-guarantor subsidiaries, and (2) the overstatement of income (loss) related to the New Zealand joint venture totaling $(0.04) million and $4.65 million for the three and nine months ended September 30, 2010, respectively, at ROC (Subsidiary Guarantor) and an understatement for the same amount for Other non-guarantor subsidiaries. Consequently, Subsidiary Guarantor and Issuer equity in income from subsidiaries, Issuer and non-guarantor subsidiaries interest and miscellaneous income (expense), net and Issuer and Non-guarantor subsidiaries income tax expense, as previously reported, were also impacted by these misallocations in lesser amounts. The information below gives effect to the correction of these matters. The aforementioned items do not impact the Company’s Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Income and Comprehensive Income or Condensed Consolidated Statement of Cash Flows for the quarter ended September 30, 2010. Management believes the effects of these corrections are not material to the Company’s previously issued condensed consolidating financial statements.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended September 30, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 342,937 |  |  | $ | 61,463 |  |  | $ | (19,309 | ) |  | $ | 385,091 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 254,969 |  |  | 32,376 |  |  | (21,161 | ) |  | 266,184 |
Selling and general expenses | — |  |  | 2,566 |  |  | — |  |  | 12,584 |  |  | 612 |  |  | — |  |  | 15,762 |
Other operating expense (income), net | — |  |  | 45 |  |  | — |  |  | (2,606 | ) |  | (1,610 | ) |  | — |  |  | (4,171 | )
| — |  |  | 2,611 |  |  | — |  |  | 264,947 |  |  | 31,378 |  |  | (21,161 | ) |  | 277,775 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 200 |  |  | 794 |  |  | — |  |  | 994 |
OPERATING (LOSS) INCOME | — |  |  | (2,611 | ) |  | — |  |  | 78,190 |  |  | 30,879 |  |  | 1,852 |  |  | 108,310 |
Interest expense | — |  |  | (440 | ) |  | (12,139 | ) |  | 328 |  |  | (105 | ) |  | — |  |  | (12,356 | )
Interest and miscellaneous income (expense), net | — |  |  | 1,332 |  |  | (1,121 | ) |  | (5,053 | ) |  | 5,173 |  |  | — |  |  | 331 |
Equity in income from subsidiaries | 104,909 |  |  | 106,350 |  |  | 76,971 |  |  | — |  |  | — |  |  | (288,230 | ) |  | — |
INCOME BEFORE INCOME TAXES | 104,909 |  |  | 104,631 |  |  | 63,711 |  |  | 73,465 |  |  | 35,947 |  |  | (286,378 | ) |  | 96,285 |
Income tax benefit | — |  |  | 278 |  |  | 4,840 |  |  | 3,506 |  |  | — |  |  | — |  |  | 8,624 |
NET INCOME | $ | 104,909 |  |  | $ | 104,909 |  |  | $ | 68,551 |  |  | $ | 76,971 |  |  | $ | 35,947 |  |  | $ | (286,378 | ) |  | $ | 104,909 |

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

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended September 30, 2010
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 349,311 |  |  | $ | 69,040 |  |  | $ | (40,836 | ) |  | $ | 377,515 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 280,715 |  |  | 33,900 |  |  | (45,412 | ) |  | 269,203 |
Selling and general expenses | — |  |  | 2,735 |  |  | — |  |  | 13,613 |  |  | 777 |  |  | — |  |  | 17,125 |
Other operating expense (income), net | — |  |  | 54 |  |  | — |  |  | 679 |  |  | (1,525 | ) |  | — |  |  | (792 | )
| — |  |  | 2,789 |  |  | — |  |  | 295,007 |  |  | 33,152 |  |  | (45,412 | ) |  | 285,536 |
Equity in income (loss) of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 147 |  |  | (44 | ) |  | — |  |  | 103 |
OPERATING (LOSS) INCOME | — |  |  | (2,789 | ) |  | — |  |  | 54,451 |  |  | 35,844 |  |  | 4,576 |  |  | 92,082 |
Interest expense | — |  |  | (80 | ) |  | (12,682 | ) |  | (153 | ) |  | (28 | ) |  | — |  |  | (12,943 | )
Interest and miscellaneous income (expense), net | — |  |  | 1,335 |  |  | (987 | ) |  | (5,178 | ) |  | 5,175 |  |  | — |  |  | 345 |
Equity in income from subsidiaries | 62,904 |  |  | 66,680 |  |  | 29,793 |  |  | — |  |  | — |  |  | (159,377 | ) |  | — |
INCOME BEFORE INCOME TAXES | 62,904 |  |  | 65,146 |  |  | 16,124 |  |  | 49,120 |  |  | 40,991 |  |  | (154,801 | ) |  | 79,484 |
Income tax (expense) benefit | — |  |  | (2,242 | ) |  | 4,989 |  |  | (19,327 | ) |  | — |  |  | — |  |  | (16,580 | )
NET INCOME | $ | 62,904 |  |  | $ | 62,904 |  |  | $ | 21,113 |  |  | $ | 29,793 |  |  | $ | 40,991 |  |  | $ | (154,801 | ) |  | $ | 62,904 |

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

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Nine Months Ended September 30, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,002,015 |  |  | $ | 147,884 |  |  | $ | (49,681 | ) |  | $ | 1,100,218 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 750,375 |  |  | 90,630 |  |  | (54,538 | ) |  | 786,467 |
Selling and general expenses | — |  |  | 7,497 |  |  | — |  |  | 38,639 |  |  | 2,051 |  |  | — |  |  | 48,187 |
Other operating expense (income), net | — |  |  | 130 |  |  | — |  |  | (406 | ) |  | (5,304 | ) |  | — |  |  | (5,580 | )
| — |  |  | 7,627 |  |  | — |  |  | 788,608 |  |  | 87,377 |  |  | (54,538 | ) |  | 829,074 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 561 |  |  | 3,256 |  |  | — |  |  | 3,817 |
OPERATING (LOSS) INCOME | — |  |  | (7,627 | ) |  | — |  |  | 213,968 |  |  | 63,763 |  |  | 4,857 |  |  | 274,961 |
Interest expense | — |  |  | (831 | ) |  | (37,350 | ) |  | 73 |  |  | (192 | ) |  | — |  |  | (38,300 | )
Interest and miscellaneous income (expense), net | — |  |  | 3,972 |  |  | (3,313 | ) |  | (15,069 | ) |  | 15,345 |  |  | — |  |  | 935 |
Equity in income from subsidiaries | 219,774 |  |  | 224,142 |  |  | 166,190 |  |  | — |  |  | — |  |  | (610,106 | ) |  | — |
INCOME BEFORE INCOME TAXES | 219,774 |  |  | 219,656 |  |  | 125,527 |  |  | 198,972 |  |  | 78,916 |  |  | (605,249 | ) |  | 237,596 |
Income tax benefit (expense) | — |  |  | 118 |  |  | 14,842 |  |  | (32,782 | ) |  | — |  |  | — |  |  | (17,822 | )
NET INCOME | $ | 219,774 |  |  | $ | 219,774 |  |  | $ | 140,369 |  |  | $ | 166,190 |  |  | $ | 78,916 |  |  | $ | (605,249 | ) |  | $ | 219,774 |

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

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Nine Months Ended September 30, 2010
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 928,643 |  |  | $ | 203,909 |  |  | $ | (132,627 | ) |  | $ | 999,925 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 754,937 |  |  | 99,782 |  |  | (109,723 | ) |  | 744,996 |
Selling and general expenses | — |  |  | 7,591 |  |  | — |  |  | 39,343 |  |  | 2,330 |  |  | — |  |  | 49,264 |
Other operating expense (income), net | — |  |  | 73 |  |  | — |  |  | (955 | ) |  | (5,738 | ) |  | — |  |  | (6,620 | )
| — |  |  | 7,664 |  |  | — |  |  | 793,325 |  |  | 96,374 |  |  | (109,723 | ) |  | 787,640 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 652 |  |  | (18 | ) |  | — |  |  | 634 |
OPERATING (LOSS) INCOME BEFORE GAIN ON SALE OF A PORTION OF THE INTEREST IN THE NEW ZEALAND JOINT VENTURE | — |  |  | (7,664 | ) |  | — |  |  | 135,970 |  |  | 107,517 |  |  | (22,904 | ) |  | 212,919 |
Gain on sale of a portion of the interest in the New Zealand joint venture | — |  |  | — |  |  | — |  |  | 7,697 |  |  | 4,670 |  |  | — |  |  | 12,367 |
OPERATING (LOSS) INCOME | — |  |  | (7,664 | ) |  | — |  |  | 143,667 |  |  | 112,187 |  |  | (22,904 | ) |  | 225,286 |
Interest expense | — |  |  | 70 |  |  | (37,643 | ) |  | — |  |  | (107 | ) |  | — |  |  | (37,680 | )
Interest and miscellaneous income (expense), net | — |  |  | 11,595 |  |  | (3,276 | ) |  | (21,835 | ) |  | 14,459 |  |  | — |  |  | 943 |
Equity in income from subsidiaries | 158,415 |  |  | 158,198 |  |  | 80,547 |  |  | — |  |  | — |  |  | (397,160 | ) |  | — |
INCOME BEFORE INCOME TAXES | 158,415 |  |  | 162,199 |  |  | 39,628 |  |  | 121,832 |  |  | 126,539 |  |  | (420,064 | ) |  | 188,549 |
Income tax (expense) benefit | — |  |  | (3,784 | ) |  | 14,935 |  |  | (41,285 | ) |  | — |  |  | — |  |  | (30,134 | )
NET INCOME | $ | 158,415 |  |  | $ | 158,415 |  |  | $ | 54,563 |  |  | $ | 80,547 |  |  | $ | 126,539 |  |  | $ | (420,064 | ) |  | $ | 158,415 |

16

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

| CONDENSED CONSOLIDATING BALANCE SHEETS As of September 30, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | — |  |  | $ | 42,375 |  |  | $ | 276,435 |  |  | $ | 10,274 |  |  | $ | 33,201 |  |  | $ | — |  |  | $ | 362,285 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | — |  |  | — |  |  | 105,707 |  |  | 1,230 |  |  | — |  |  | 106,937 |
Inventory | — |  |  | 76 |  |  | — |  |  | 128,716 |  |  | — |  |  | (14,678 | ) |  | 114,114 |
Intercompany interest receivable | — |  |  | — |  |  | — |  |  | — |  |  | 4,257 |  |  | (4,257 | ) |  | — |
Income tax receivable | — |  |  | 1,624 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,624 |
Prepaid and other current assets | — |  |  | 1,222 |  |  | 816 |  |  | 51,314 |  |  | 10,106 |  |  | — |  |  | 63,458 |
Total current assets | — |  |  | 45,297 |  |  | 277,251 |  |  | 296,011 |  |  | 48,794 |  |  | (18,935 | ) |  | 648,418 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | 23 |  |  | — |  |  | 38,422 |  |  | 1,152,051 |  |  | 1,860 |  |  | 1,192,356 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 2,418 |  |  | — |  |  | 416,441 |  |  | 1,749 |  |  | — |  |  | 420,608 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | — |  |  | (11,356 | ) |  | 91,637 |  |  | — |  |  | 80,281 |
INVESTMENT IN SUBSIDIARIES | 1,368,031 |  |  | 1,577,960 |  |  | 1,059,932 |  |  | — |  |  | — |  |  | (4,005,923 | ) |  | — |
OTHER ASSETS | — |  |  | 27,555 |  |  | 7,285 |  |  | 656,407 |  |  | 6,741 |  |  | (544,930 | ) |  | 153,058 |
TOTAL ASSETS | $ | 1,368,031 |  |  | $ | 1,653,253 |  |  | $ | 1,344,468 |  |  | $ | 1,395,925 |  |  | $ | 1,300,972 |  |  | $ | (4,567,928 | ) |  | $ | 2,494,721 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 785 |  |  | $ | 22 |  |  | $ | 64,746 |  |  | $ | 2,942 |  |  | $ | — |  |  | $ | 68,495 |
Current maturities of long-term debt | — |  |  | — |  |  | 116,167 |  |  | — |  |  | — |  |  | — |  |  | 116,167 |
Accrued taxes | — |  |  | 13 |  |  | — |  |  | 16,572 |  |  | 6,309 |  |  | — |  |  | 22,894 |
Accrued payroll and benefits | — |  |  | 12,761 |  |  | — |  |  | 9,761 |  |  | 2,197 |  |  | — |  |  | 24,719 |
Accrued interest | — |  |  | 278 |  |  | 10,773 |  |  | 891 |  |  | — |  |  | — |  |  | 11,942 |
Accrued customer incentives | — |  |  | — |  |  | — |  |  | 9,265 |  |  | — |  |  | — |  |  | 9,265 |
Other current liabilities | — |  |  | 1,656 |  |  | — |  |  | 19,730 |  |  | 14,251 |  |  | — |  |  | 35,637 |
Current liabilities for dispositions and discontinued operations | — |  |  | — |  |  | — |  |  | 11,090 |  |  | — |  |  | — |  |  | 11,090 |
Total current liabilities | — |  |  | 15,493 |  |  | 126,962 |  |  | 132,055 |  |  | 25,699 |  |  | — |  |  | 300,209 |
LONG-TERM DEBT | — |  |  | 75,000 |  |  | 583,464 |  |  | — |  |  | — |  |  | — |  |  | 658,464 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | — |  |  | — |  |  | 75,213 |  |  | — |  |  | — |  |  | 75,213 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 64,522 |  |  | — |  |  | 990 |  |  | — |  |  | — |  |  | 65,512 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 19,626 |  |  | — |  |  | 7,035 |  |  | 631 |  |  | — |  |  | 27,292 |
INTERCOMPANY PAYABLE | — |  |  | 110,581 |  |  | — |  |  | 120,700 |  |  | (7,440 | ) |  | (223,841 | ) |  | — |
TOTAL LIABILITIES | — |  |  | 285,222 |  |  | 710,426 |  |  | 335,993 |  |  | 18,890 |  |  | (223,841 | ) |  | 1,126,690 |
TOTAL SHAREHOLDERS’ EQUITY | 1,368,031 |  |  | 1,368,031 |  |  | 634,042 |  |  | 1,059,932 |  |  | 1,282,082 |  |  | (4,344,087 | ) |  | 1,368,031 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,368,031 |  |  | $ | 1,653,253 |  |  | $ | 1,344,468 |  |  | $ | 1,395,925 |  |  | $ | 1,300,972 |  |  | $ | (4,567,928 | ) |  | $ | 2,494,721 |

17

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

| CONDENSED CONSOLIDATING BALANCE SHEETS As of December 31, 2010 |
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | — |  |  | $ | 29,759 |  |  | $ | 283,258 |  |  | $ | 1,280 |  |  | $ | 35,166 |  |  | $ | — |  |  | $ | 349,463 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | 1 |  |  | — |  |  | 81,288 |  |  | 1,351 |  |  | — |  |  | 82,640 |
Inventory | — |  |  | — |  |  | — |  |  | 123,432 |  |  | — |  |  | (13,397 | ) |  | 110,035 |
Intercompany interest receivable | — |  |  | — |  |  | — |  |  | — |  |  | 4,320 |  |  | (4,320 | ) |  | — |
Income tax receivable | — |  |  | 1,750 |  |  | — |  |  | 19,984 |  |  | — |  |  | — |  |  | 21,734 |
Prepaid and other current assets | — |  |  | 1,273 |  |  | 842 |  |  | 38,697 |  |  | 4,502 |  |  | — |  |  | 45,314 |
Total current assets | — |  |  | 32,783 |  |  | 284,100 |  |  | 264,681 |  |  | 45,339 |  |  | (17,717 | ) |  | 609,186 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | — |  |  | — |  |  | 37,398 |  |  | 1,098,870 |  |  | 1,663 |  |  | 1,137,931 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 2,819 |  |  | — |  |  | 380,577 |  |  | 1,711 |  |  | 197 |  |  | 385,304 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | — |  |  | (12,282 | ) |  | 80,765 |  |  | — |  |  | 68,483 |
INVESTMENT IN SUBSIDIARIES | 1,251,582 |  |  | 1,392,465 |  |  | 987,381 |  |  | — |  |  | — |  |  | (3,631,428 | ) |  | — |
OTHER ASSETS | — |  |  | 26,642 |  |  | 9,351 |  |  | 664,664 |  |  | 13,153 |  |  | (551,061 | ) |  | 162,749 |
TOTAL ASSETS | $ | 1,251,582 |  |  | $ | 1,454,709 |  |  | $ | 1,280,832 |  |  | $ | 1,335,038 |  |  | $ | 1,239,838 |  |  | $ | (4,198,346 | ) |  | $ | 2,363,653 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 823 |  |  | $ | 20 |  |  | $ | 55,052 |  |  | $ | 2,090 |  |  | $ | — |  |  | $ | 57,985 |
Current maturities of long-term debt | — |  |  | — |  |  | 93,057 |  |  | — |  |  | — |  |  | — |  |  | 93,057 |
Accrued taxes | — |  |  | — |  |  | — |  |  | 8,283 |  |  | 2,054 |  |  | — |  |  | 10,337 |
Accrued payroll and benefits | — |  |  | 13,507 |  |  | — |  |  | 9,590 |  |  | 2,369 |  |  | — |  |  | 25,466 |
Accrued interest | — |  |  | 12 |  |  | 5,591 |  |  | 603 |  |  | — |  |  | — |  |  | 6,206 |
Accrued customer incentives | — |  |  | — |  |  | — |  |  | 9,759 |  |  | — |  |  | — |  |  | 9,759 |
Other current liabilities | — |  |  | 2,608 |  |  | — |  |  | 20,071 |  |  | 7,959 |  |  | — |  |  | 30,638 |
Current liabilities for dispositions and discontinued operations | — |  |  | — |  |  | — |  |  | 11,500 |  |  | — |  |  | — |  |  | 11,500 |
Total current liabilities | — |  |  | 16,950 |  |  | 98,668 |  |  | 114,858 |  |  | 14,472 |  |  | — |  |  | 244,948 |
LONG-TERM DEBT | — |  |  | — |  |  | 675,103 |  |  | — |  |  | — |  |  | — |  |  | 675,103 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | — |  |  | — |  |  | 81,660 |  |  | — |  |  | — |  |  | 81,660 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 63,759 |  |  | — |  |  | 2,576 |  |  | — |  |  | — |  |  | 66,335 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 19,811 |  |  | — |  |  | 23,552 |  |  | 662 |  |  | — |  |  | 44,025 |
INTERCOMPANY PAYABLE | — |  |  | 102,607 |  |  | — |  |  | 125,011 |  |  | (3,751 | ) |  | (223,867 | ) |  | — |
TOTAL LIABILITIES | — |  |  | 203,127 |  |  | 773,771 |  |  | 347,657 |  |  | 11,383 |  |  | (223,867 | ) |  | 1,112,071 |
TOTAL SHAREHOLDERS’ EQUITY | 1,251,582 |  |  | 1,251,582 |  |  | 507,061 |  |  | 987,381 |  |  | 1,228,455 |  |  | (3,974,479 | ) |  | 1,251,582 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,251,582 |  |  | $ | 1,454,709 |  |  | $ | 1,280,832 |  |  | $ | 1,335,038 |  |  | $ | 1,239,838 |  |  | $ | (4,198,346 | ) |  | $ | 2,363,653 |

18

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

| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 136,224 |  |  | $ | 147,352 |  |  | $ | 15,000 |  |  | $ | 165,221 |  |  | $ | 136,241 |  |  | $ | (273,768 | ) |  | $ | 326,270 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (16 | ) |  | — |  |  | (60,950 | ) |  | (26,190 | ) |  | — |  |  | (87,156 | )
Purchase of timberlands | — |  |  | — |  |  | — |  |  | (5,638 | ) |  | (88,524 | ) |  | — |  |  | (94,162 | )
Jesup mill cellulose specialties expansion | — |  |  | — |  |  | — |  |  | (14,567 | ) |  | — |  |  | — |  |  | (14,567 | )
Change in restricted cash | — |  |  | — |  |  | — |  |  | — |  |  | 8,323 |  |  | — |  |  | 8,323 |
Investment In Subsidiaries | — |  |  | (73,736 | ) |  | 68,613 |  |  | — |  |  | — |  |  | 5,123 |  |  | — |
Other | — |  |  | — |  |  | — |  |  | 7,092 |  |  | (71 | ) |  | — |  |  | 7,021 |
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | — |  |  | (73,752 | ) |  | 68,613 |  |  | (74,063 | ) |  | (106,462 | ) |  | 5,123 |  |  | (180,541 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Issuance of debt | — |  |  | 75,000 |  |  | — |  |  | — |  |  | 105,000 |  |  | — |  |  | 180,000 |
Repayment of debt | — |  |  | — |  |  | (75,000 | ) |  | — |  |  | (105,000 | ) |  | — |  |  | (180,000 | )
Dividends paid | (136,563 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (136,563 | )
Proceeds from the issuance of common shares | 8,248 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 8,248 |
Excess tax benefits on stock-based compensation | — |  |  | — |  |  | — |  |  | 4,951 |  |  | — |  |  | — |  |  | 4,951 |
Debt issuance costs | — |  |  | (675 | ) |  | (676 | ) |  | — |  |  | (676 | ) |  | — |  |  | (2,027 | )
Repurchase of common shares | (7,909 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,909 | )
Intercompany distributions | — |  |  | (135,309 | ) |  | (14,760 | ) |  | (87,508 | ) |  | (31,068 | ) |  | 268,645 |  |  | — |
CASH USED FOR FINANCING ACTIVITIES | (136,224 | ) |  | (60,984 | ) |  | (90,436 | ) |  | (82,557 | ) |  | (31,744 | ) |  | 268,645 |  |  | (133,300 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | — |  |  | 393 |  |  | — |  |  | — |  |  | 393 |
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | — |  |  | 12,616 |  |  | (6,823 | ) |  | 8,994 |  |  | (1,965 | ) |  | — |  |  | 12,822 |
Balance, beginning of year | — |  |  | 29,759 |  |  | 283,258 |  |  | 1,280 |  |  | 35,166 |  |  | — |  |  | 349,463 |
Balance, end of period | $ | — |  |  | $ | 42,375 |  |  | $ | 276,435 |  |  | $ | 10,274 |  |  | $ | 33,201 |  |  | $ | — |  |  | $ | 362,285 |

19

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

| CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2010
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 104,652 |  |  | $ | 146,909 |  |  | $ | 25,000 |  |  | $ | 296,986 |  |  | $ | 196,190 |  |  | $ | (296,530 | ) |  | $ | 473,207 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (818 | ) |  | — |  |  | (73,617 | ) |  | (21,179 | ) |  | — |  |  | (95,614 | )
Intercompany purchase of timberlands and real estate | — |  |  | — |  |  | — |  |  | (41,253 | ) |  | (48,487 | ) |  | 89,740 |  |  | — |
Change in restricted cash | — |  |  | — |  |  | — |  |  | — |  |  | (13,209 | ) |  | — |  |  | (13,209 | )
Investment in Subsidiaries | — |  |  | — |  |  | 164,281 |  |  | — |  |  | — |  |  | (164,281 | ) |  | — |
Other | — |  |  | — |  |  | — |  |  | 6,590 |  |  | (379 | ) |  | — |  |  | 6,211 |
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | — |  |  | (818 | ) |  | 164,281 |  |  | (108,280 | ) |  | (83,254 | ) |  | (74,541 | ) |  | (102,612 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Issuance of debt | — |  |  | — |  |  | 75,000 |  |  | — |  |  | 82,000 |  |  | — |  |  | 157,000 |
Repayment of debt | — |  |  | (5,000 | ) |  | (4,650 | ) |  | — |  |  | (87,000 | ) |  | — |  |  | (96,650 | )
Dividends paid | (120,156 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (120,156 | )
Proceeds from the issuance of common shares | 21,532 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 21,532 |
Excess tax benefits on stock-based compensation | — |  |  | — |  |  | — |  |  | 5,071 |  |  | — |  |  | — |  |  | 5,071 |
Debt issuance costs | — |  |  | — |  |  | (537 | ) |  | — |  |  | — |  |  | — |  |  | (537 | )
Repurchase of common shares | (6,028 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (6,028 | )
Intercompany distributions | — |  |  | (104,652 | ) |  | (25,000 | ) |  | (193,178 | ) |  | (48,241 | ) |  | 371,071 |  |  | — |
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES | (104,652 | ) |  | (109,652 | ) |  | 44,813 |  |  | (188,107 | ) |  | (53,241 | ) |  | 371,071 |  |  | (39,768 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | — |  |  | (126 | ) |  | — |  |  | — |  |  | (126 | )
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | — |  |  | 36,439 |  |  | 234,094 |  |  | 473 |  |  | 59,695 |  |  | — |  |  | 330,701 |
Balance, beginning of year | — |  |  | 2,895 |  |  | 67,494 |  |  | 2,228 |  |  | 2,347 |  |  | — |  |  | 74,964 |
Balance, end of period | $ | — |  |  | $ | 39,334 |  |  | $ | 301,588 |  |  | $ | 2,701 |  |  | $ | 62,042 |  |  | $ | — |  |  | $ | 405,665 |

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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations

When we refer to "we," "us," "our," "the Company," or "Rayonier," we mean Rayonier Inc. and its consolidated subsidiaries. References herein to "Notes to Financial Statements" refer to the Notes to the Condensed Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.
The Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with the 2010 Annual Report on Form 10-K.
Forward - Looking Statements
Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier's future financial and operational performance, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements may be identified by the use of words such as "may," "will," "should," "expect," "estimate," "believe," "anticipate" and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements. The risk factors contained in Item 1A - Risk Factors in our 2010 Annual Report on Form 10-K, among others, could cause actual results to differ materially from those expressed in forward-looking statements that are made in this document.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward- looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2010 Annual Report on Form 10-K.
Segments
Effective first quarter 2011, we reorganized our United States timber operations from the Eastern and Western regions into the Atlantic (Florida and Georgia), Gulf States (Alabama, Arkansas, Louisiana, Oklahoma and Texas) and Northern (New York and Washington) regions. Additionally, we renamed the Timber segment, Forest Resources. All prior periods presented have been restated to conform with this new structure.
We are a leading international forest products company primarily engaged in timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Forest Resources, Real Estate, Performance Fibers, and Wood Products. Forest Resources sales include all activities which relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by our real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in "Other Operations." Sales between operating segments are made based on fair market value, and intercompany sales, purchases and profits or losses are eliminated in consolidation.
We evaluate financial performance based on the operating income of the segments. Operating income, as presented in the Condensed Consolidated Statements of Income and Comprehensive Income, is equal to segment income (loss). Certain income (loss) items in the Condensed Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations.
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Results of Operations

| Three Months Ended September 30, |  | Nine Months Ended September 30,
Financial Information (in millions) | 2011 |  | 2010 |  | 2011 |  | 2010
Sales |  |  |  |  |  |  |
Forest Resources |  |  |  |  |  |  |
Atlantic | $ | 20 |  |  | $ | 18 |  |  | $ | 50 |  |  | $ | 59 |
Gulf States | 7 |  |  | 7 |  |  | 23 |  |  | 24 |
Northern | 27 |  |  | 20 |  |  | 81 |  |  | 53 |
New Zealand | 3 |  |  | 2 |  |  | 8 |  |  | 7 |
Total Forest Resources | 57 |  |  | 47 |  |  | 162 |  |  | 143 |
Real Estate |  |  |  |  |  |  |
Development | — |  |  | — |  |  | 1 |  |  | 2 |
Rural | 6 |  |  | 19 |  |  | 28 |  |  | 26 |
Non-Strategic Timberlands | 26 |  |  | 26 |  |  | 29 |  |  | 63 |
Total Real Estate | 32 |  |  | 45 |  |  | 58 |  |  | 91 |
Performance Fibers |  |  |  |  |  |  |
Cellulose specialties | 207 |  |  | 187 |  |  | 594 |  |  | 507 |
Absorbent materials | 48 |  |  | 59 |  |  | 145 |  |  | 141 |
Total Performance Fibers | 255 |  |  | 246 |  |  | 739 |  |  | 648 |
Wood Products | 16 |  |  | 15 |  |  | 50 |  |  | 52 |
Other Operations | 26 |  |  | 25 |  |  | 95 |  |  | 73 |
Intersegment Eliminations | (1 | ) |  | — |  |  | (4 | ) |  | (7 | )
Total Sales | $ | 385 |  |  | $ | 378 |  |  | $ | 1,100 |  |  | $ | 1,000 |
Operating Income (Loss) |  |  |  |  |  |  |
Forest Resources | $ | 11 |  |  | $ | 9 |  |  | $ | 34 |  |  | $ | 26 |
Real Estate | 28 |  |  | 31 |  |  | 40 |  |  | 52 |
Performance Fibers | 75 |  |  | 62 |  |  | 222 |  |  | 152 |
Wood Products | (1 | ) |  | (1 | ) |  | (1 | ) |  | 3 |
Other Operations | 1 |  |  | (1 | ) |  | 1 |  |  | 1 |
Corporate and other (a) | (6 | ) |  | (8 | ) |  | (21 | ) |  | (9 | )
Operating Income | 108 |  |  | 92 |  |  | 275 |  |  | 225 |
Interest Expense, Interest Income and Other | (12 | ) |  | (12 | ) |  | (37 | ) |  | (37 | )
Income Tax Benefit (Expense) (b) | 9 |  |  | (17 | ) |  | (18 | ) |  | (30 | )
Net Income | $ | 105 |  |  | $ | 63 |  |  | $ | 220 |  |  | $ | 158 |
Diluted Earnings Per Share | $ | 0.84 |  |  | $ | 0.51 |  |  | $ | 1.75 |  |  | $ | 1.30 |

(a) | The nine months ended September 30, 2010 include a gain of $12 million from the sale of a portion of our interest in the New Zealand joint venture. See Note 5 — Joint Venture Investment for additional information.

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

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FOREST RESOURCES

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/ Mix/Other |
Atlantic | $ | 18 |  |  | $ | (1 | ) |  | $ | 3 |  |  | $ | 20 |
Gulf States | 7 |  |  | — |  |  | — |  |  | 7 |
Northern | 20 |  |  | 6 |  |  | 1 |  |  | 27 |
New Zealand | 2 |  |  | — |  |  | 1 |  |  | 3 |
Total Sales | $ | 47 |  |  | $ | 5 |  |  | $ | 5 |  |  | $ | 57 |

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/ Mix/Other |
Atlantic | $ | 59 |  |  | $ | (1 | ) |  | $ | (8 | ) |  | $ | 50 |
Gulf States | 24 |  |  | — |  |  | (1 | ) |  | 23 |
Northern | 53 |  |  | 21 |  |  | 7 |  |  | 81 |
New Zealand | 7 |  |  | — |  |  | 1 |  |  | 8 |
Total Sales | $ | 143 |  |  | $ | 20 |  |  | $ | (1 | ) |  | $ | 162 |

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/ Mix |  | Cost/Other |
Atlantic | $ | 4 |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (2 | ) |  | $ | 2 |
Gulf States | 1 |  |  | — |  |  | — |  |  | (1 | ) |  | — |
Northern | 4 |  |  | 6 |  |  | 1 |  |  | (3 | ) |  | 8 |
New Zealand/Other | — |  |  | — |  |  | — |  |  | 1 |  |  | 1 |
Total Operating Income | $ | 9 |  |  | $ | 5 |  |  | $ | 2 |  |  | $ | (5 | ) |  | $ | 11 |

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/ Mix |  | Cost/Other |
Atlantic | $ | 12 |  |  | $ | (1 | ) |  | $ | (3 | ) |  | $ | (4 | ) |  | $ | 4 |
Gulf States | 7 |  |  | — |  |  | (2 | ) |  | (5 | ) |  | — |
Northern | 7 |  |  | 21 |  |  | 5 |  |  | (7 | ) |  | 26 |
New Zealand/Other | — |  |  | — |  |  | — |  |  | 4 |  |  | 4 |
Total Operating Income | $ | 26 |  |  | $ | 20 |  |  | $ | — |  |  | $ | (12 | ) |  | $ | 34 |

The Atlantic region's third quarter sales increased from the prior year period reflecting a 14 percent increase in sales volumes and a two percent decline in average prices due to the impact of fire salvage wood on the pine pulpwood market. Year-to-date sales decreased from the prior year period due to a one percent decrease in prices and a 14 percent decline in volumes resulting from lower sawlog demand and the impact of accelerating volumes in 2010 to the first half of the year to capitalize on higher prices.
The Atlantic region's third quarter and year-to-date operating income decreased from the prior year periods. In the third quarter, the decline in prices and increase in expenses was primarily due to forest fires which more than offset higher sales volumes. Year-to-date operating income was negatively impacted by $2 million in losses from forest fires.
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The Gulf States' sales were consistent for third quarter 2011 and 2010, but slightly down year-to-date compared to the prior year period primarily due to a 16 percent decline in sales volume from softer grade markets. Operating income for the three and nine months ended September 30, 2011 declined from the prior year periods reflecting higher depletion expense due to geographic sales mix. The year-to-date results were further worsened by $1 million in losses from forest fires.
The Northern region's third quarter and year-to-date sales and operating income improved from the prior year periods due to strong export demand from Asian markets. Prices increased 21 percent and 26 percent for the quarter and year-to-date, respectively, while volumes rose 11 percent and 22 percent, respectively. Log costs increased primarily due to higher logging and transportation costs.
The New Zealand sales represent timberland management fees for services provided to a New Zealand joint venture ("JV") in which we own 26 percent. The operating income primarily represents equity earnings related to the JV's timber activities. Operating income improved for the three and nine months ended September 30, 2011 from the prior year periods due to higher export and domestic prices and the sale of carbon credits.
REAL ESTATE
Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: development HBU, rural HBU and non-strategic timberlands. Our strategy is to extract maximum value from our HBU properties. We pursue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses.

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/ Mix |
Development | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Rural | 19 |  |  | 1 |  |  | (14 | ) |  | 6 |
Non-Strategic Timberlands | 26 |  |  | 12 |  |  | (12 | ) |  | 26 |
Total Sales | $ | 45 |  |  | $ | 13 |  |  | $ | (26 | ) |  | $ | 32 |

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/ Mix |
Development | $ | 2 |  |  | $ | — |  |  | $ | (1 | ) |  | $ | 1 |
Rural | 26 |  |  | 7 |  |  | (5 | ) |  | 28 |
Non-Strategic Timberlands | 63 |  |  | 17 |  |  | (51 | ) |  | 29 |
Total Sales | $ | 91 |  |  | $ | 24 |  |  | $ | (57 | ) |  | $ | 58 |

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume |  | Cost/Other |
Total Operating Income | $ | 31 |  |  | $ | 13 |  |  | $ | (19 | ) |  | $ | 3 |  |  | $ | 28 |

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume |  | Cost/Other |
Total Operating Income | $ | 52 |  |  | $ | 24 |  |  | $ | (36 | ) |  | $ | — |  |  | $ | 40 |

Third quarter and year-to-date sales and operating income declined from the prior year periods. Rural prices per acre increased 12 percent and 32 percent for the three and nine months ended September 30, 2011 compared to the prior year periods, respectively, primarily due to improved property mix; however, rural sales volumes declined reflecting fewer sales of conservation property. Rural sales volumes were 2,946 acres and 12,411 acres for third quarter and year-to-date 2011, respectively, compared to 10,242 acres and 15,192 acres in the comparable prior year periods.
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Non-strategic timberland prices rose $1,782 per acre, or 88 percent, for third quarter and $2,118 per acre, or 146 percent, year-to-date from the prior year periods. The 2011 periods included a 6,300 acre sale at $3,995 per acre in the Northwest. However, as expected, non-strategic timberland volumes declined as inventories decreased. Sales volumes were 6,814 acres and 8,040 acres for third quarter and year-to-date 2011, respectively, compared to 12,912 acres and 43,134 acres in the comparable prior year periods.
Third quarter and year-to-date 2011 operating income benefited from a $6 million property tax settlement covering years 2005 through 2010. This benefit was offset by higher costs due to property mix.
PERFORMANCE FIBERS

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/ Mix |
Cellulose specialties | $ | 187 |  |  | $ | 26 |  |  | $ | (6 | ) |  | $ | 207 |
Absorbent materials | 59 |  |  | (1 | ) |  | (10 | ) |  | 48 |
Total Sales | $ | 246 |  |  | $ | 25 |  |  | $ | (16 | ) |  | $ | 255 |

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/ Mix |
Cellulose specialties | $ | 507 |  |  | $ | 79 |  |  | $ | 8 |  |  | $ | 594 |
Absorbent materials | 141 |  |  | 16 |  |  | (12 | ) |  | 145 |
Total Sales | $ | 648 |  |  | $ | 95 |  |  | $ | (4 | ) |  | $ | 739 |

Cellulose specialties sales improved in 2011 versus prior year as prices increased 15 percent for both the quarter and year-to-date, respectively, reflecting strong demand. Although volumes were down three percent for the quarter due to the timing of customer orders, volumes increased two percent year-to-date 2011 from the prior year period reflecting a shift in production from absorbent materials to cellulose specialties.
Absorbent materials sales decreased in the quarter as prices and volumes declined three percent and 16 percent from the prior year period, respectively, reflecting weaker markets and the timing of customer orders. However, year to date sales are above prior year as a 13 percent price improvement from stronger markets in the first-half of the year more than offset the third quarter price reduction due to weaker markets and an eight percent decline in volumes from 2010 due to a shift in production to cellulose specialties.

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/ Mix |  | Cost/Other |
Total Operating Income | $ | 62 |  |  | $ | 25 |  |  | $ | (3 | ) |  | $ | (9 | ) |  | $ | 75 |

Operating Income (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/ Mix |  | Cost/Other |
Total Operating Income | $ | 152 |  |  | $ | 95 |  |  | $ | 2 |  |  | $ | (27 | ) |  | $ | 222 |

Operating income improved in both 2011 periods over prior year as increased sales more than offset higher input and transportation costs.
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WOOD PRODUCTS

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume |
Total Sales | $ | 15 |  |  | $ | — |  |  | $ | 1 |  |  | $ | 16 |

Sales (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume |
Total Sales | $ | 52 |  |  | $ | (5 | ) |  | $ | 3 |  |  | $ | 50 |

Operating Loss (in millions) | 2010 |  | Changes Attributable to: |  | 2011
Three months ended September 30, | Price |  | Volume/Costs |
Total Operating Income (Loss) | $ | (1 | ) |  | $ | — |  |  | $ | — |  |  | $ | (1 | )

Operating Income (Loss)(in millions) | 2010 |  | Changes Attributable to: |  | 2011
Nine months ended September 30, | Price |  | Volume/Costs |
Total Operating Income (Loss) | $ | 3 |  |  | $ | (5 | ) |  | $ | 1 |  |  | $ | (1 | )

Sales increased for the quarter while operating results remained consistent to the prior year period as volumes rose 10 percent due to higher production but margins continued to be low. Year-to-date sales and operating results declined as prices decreased 10 percent from the prior year period as prices for the first half of 2010 benefited from wet weather. Year-to-date results also reflect a seven percent increase in sales volumes due to higher production.
OTHER OPERATIONS
Sales and operating income improved for the quarter and nine months ended September 30, 2011 from the 2010 periods primarily due to higher export demand and foreign exchange gains, respectively.
Corporate and Other Expense/Eliminations
Corporate and other expenses of $6 million for third quarter 2011 were $2 million below the prior year period primarily due to the receipt of an insurance settlement.
Year-to-date, corporate and other expenses were $21 million, consistent with 2010 excluding the first quarter 2010 New Zealand gain on sale.
Interest Expense, Interest Income and Other
Interest and other were relatively comparable for the 2011 and 2010 periods.
Income Tax Expense
The effective tax rates for the quarter and year-to-date 2011 were a 9.0 percent benefit and a 7.5 percent expense, respectively. The effective tax rates for the comparable 2010 periods were 20.9 percent and 16.0 percent, respectively. The decline in the effective tax rates for the 2011 periods is primarily due to the reversal of the $16 million reserve relating to the taxability of the AFMC and a $9 million benefit associated with the structuring of a transfer of HBU properties to the taxable REIT subsidiary from the REIT.
Outlook
We are increasing our 2011 guidance as we now expect earnings of $2.07 to $2.15 per share, excluding special items, versus our prior guidance of $1.90 to $2.07 per share. The increase is primarily due to the third quarter property tax settlement and income tax reductions. Included in the updated guidance is a potential fourth quarter 2011 asset write-off of approximately $6 million related to modifications of the 2008 Jesup mill consent order (the "consent order"), which we requested as part of the Jesup mill cellulose specialties expansion.
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Our full year 2011 financial guidance is subject to a number of variables and uncertainties, including those discussed under Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations, Forward - Looking Statements of this Form 10-Q and Item 1A - Risk Factors in our 2010 Annual Report on Form 10-K.
Liquidity and Capital Resources
Our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality in working capital needs and long-term debt has been used to fund major acquisitions.
Summary of Liquidity and Financing Commitments (in millions of dollars)

| As of September 30, |  | As of December 31,
| 2011 |  | 2010
Cash and cash equivalents (a) | $ | 362 |  |  | $ | 349 |
Total debt | 775 |  |  | 768 |
Shareholders’ equity | 1,368 |  |  | 1,252 |
Total capitalization (total debt plus equity) | 2,143 |  |  | 2,020 |
Debt to capital ratio | 36 | % |  | 38 | %

(a) Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended September 30:

| 2011 |  | 2010
Cash provided by (used for): |  |  |
Operating activities | $ | 326 |  |  | $ | 473 |
Investing activities | (181 | ) |  | (103 | )
Financing activities | (133 | ) |  | (40 | )

Cash Provided by Operating Activities
Cash provided by operating activities decreased mainly due to a cash refund of $189 million related to the AFMC received in April 2010. Excluding the impact of this receipt, cash provided by operations increased $42 million primarily due to higher earnings in our Performance Fibers and Forest Resources segments, partially offset by lower operating results in our Real Estate segment.
Cash Used for Investing Activities
Cash used for investing activities increased primarily due to $94 million of strategic timberland acquisitions and $15 million invested to date in the Jesup mill cellulose specialties expansion. This increase was partially offset by a decrease in restricted cash from the timing of like-kind exchange transactions and lower capital expenditures.
Cash Used for Financing Activities
Cash used for financing activities increased $93 million mainly due to higher net debt borrowings in 2010. Additionally, 2011 dividend payments were 14 percent higher reflecting dividend increases in fourth quarter 2010 and third quarter 2011, partially offset by lower proceeds from the issuance of shares under incentive stock plans.
Stock Split and Dividend Increase
On July 22, 2011, the Company's Board of Directors approved a 3-for-2 stock split as well as an increase in the quarterly dividend per common share from $0.36 per share to $0.40 per share on a post-split basis. The additional shares were distributed on August 24, 2011 to shareholders of record as of August 10, 2011, and the dividend increase was effective starting with the third quarter dividend, which was paid on September 30, 2011, to shareholders of record as of September 16, 2011.
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Expected 2011 Expenditures
In May 2011, Rayonier's Board of Directors approved the conversion of our existing absorbent materials line in Jesup, Georgia to produce high purity cellulose specialties. The estimated cost of the project is approximately $300 million over the next two to three years and may be funded by cash on hand or new debt. Expenditures in 2011 related to this project are forecast between $45 million and $50 million. Strategic timberland acquisitions through the nine months ended September 30, 2011 totaled $94 million. As previously announced, we expect to close on a $330 million timberland acquisition in fourth quarter 2011. This acquisition will initially be funded with cash on hand, our revolving credit facility and the assumption of the sellers' existing debt. We expect full year 2011 strategic timberland acquisitions to range between $430 million and $435 million. Capital expenditures (excluding timberland acquisitions and the Jesup mill cellulose specialties expansion) in 2011 are forecast to be approximately $145 million compared to $138 million in 2010.
Our 2011 dividend payments are expected to increase from $165 million in 2010 to $186 million assuming no change in the recently approved quarterly dividend rate of $0.40 per share on a post-split basis. We have a $93 million note payable which matures on December 31, 2011. While we expect to repay this note using cash on hand, we may issue new debt.
We made no discretionary pension contributions during the nine months ending September 30, 2011. We have no mandatory pension contributions and we do not expect to make any discretionary contributions in 2011. Cash tax payments for the nine months ending September 30, 2011 were $5 million. Cash payments for income taxes in 2011 are anticipated to be between $15 million and $20 million. Expenditures related to dispositions and discontinued operations were $7 million for the nine months ending September 30, 2011. Full year 2011 expenditures of approximately $10 million are anticipated. See Note 10 — Liabilities for Dispositions and Discontinued Operations for further information.
Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization ("EBITDA"), and Adjusted Cash Available for Distribution ("Adjusted CAD"). These measures are not defined by Generally Accepted Accounting Principles ("GAAP") and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA as a performance measure and Adjusted CAD as a liquidity measure. EBITDA is defined by the Securities and Exchange Commission. Adjusted CAD as defined, however, may not be comparable to similarly titled measures reported by other companies.
We reconcile EBITDA to Net Income for the consolidated Company and Operating Income for the Segments, as those are the nearest GAAP measures for each. Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions of dollars):

| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2011 |  | 2010 |  | 2011 |  | 2010 |  |
Net Income to EBITDA Reconciliation |  |  |  |  |  |  |  |  |
Net Income | $ | 105 |  |  | $ | 63 |  |  | $ | 220 |  |  | $ | 158 |  |  |
Income tax (benefit) expense | (9 | ) |  | 17 |  |  | 18 |  |  | 30 |  |  |
Interest, net | 12 |  |  | 12 |  |  | 37 |  |  | 37 |  |  |
Depreciation, depletion and amortization | 39 |  |  | 39 |  |  | 102 |  |  | 116 |  |  |
EBITDA | $ | 147 |  |  | $ | 131 |  |  | $ | 377 |  |  | $ | 341 |  |  |

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EBITDA by segment is a critical valuation measure used by our Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how the Company is performing relative to the assets under management. EBITDA by segment for the respective periods was as follows (millions of dollars):

| Three Months Ended September 30, |  | Nine Months Ended September 30, |
| 2011 |  | 2010 |  | 2011 |  | 2010 |
EBITDA by Segment |  |  |  |  |  |  |  |
Forest Resources | $ | 28 |  |  | $ | 24 |  |  | $ | 82 |  |  | $ | 75 |  |
Real Estate | 34 |  |  | 40 |  |  | 51 |  |  | 73 |  |
Performance Fibers | 91 |  |  | 76 |  |  | 262 |  |  | 194 |  |
Wood Products | (1 | ) |  | — |  |  | 1 |  |  | 6 |  |
Other Operations | 1 |  |  | (1 | ) |  | 1 |  |  | 1 |  |
Corporate and other (a) | (6 | ) |  | (8 | ) |  | (20 | ) |  | (8 | ) |
EBITDA | $ | 147 |  |  | $ | 131 |  |  | $ | 377 |  |  | $ | 341 |  |

(a) The results for the nine months ended September 30, 2010 include a gain of $12 million from the sale of a portion of our interest in the New Zealand JV.
For the three and nine months ended September 30, 2011, EBITDA was higher than the prior year periods due to higher operating results.
The following tables reconcile Operating Income by segment to EBITDA by segment (millions of dollars):

| Forest Resources |  | Real Estate |  | Performance Fibers |  | Wood Products |  | Other Operations |  | Corporate and Other |  | Total
Three Months Ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income (Loss) | $ | 11 |  |  | $ | 28 |  |  | $ | 75 |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (6 | ) |  | $ | 108 |
Add: Depreciation, depletion and amortization | 17 |  |  | 6 |  |  | 16 |  |  | — |  |  | — |  |  | — |  |  | 39 |
EBITDA | $ | 28 |  |  | $ | 34 |  |  | $ | 91 |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (6 | ) |  | $ | 147 |
Three Months Ended September 30, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income (Loss) | $ | 9 |  |  | $ | 31 |  |  | $ | 62 |  |  | $ | (1 | ) |  | $ | (1 | ) |  | $ | (8 | ) |  | $ | 92 |
Add: Depreciation, depletion and amortization | 15 |  |  | 9 |  |  | 14 |  |  | 1 |  |  | — |  |  | — |  |  | 39 |
EBITDA | $ | 24 |  |  | $ | 40 |  |  | $ | 76 |  |  | $ | — |  |  | $ | (1 | ) |  | $ | (8 | ) |  | $ | 131 |
Nine Months Ended September 30, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income (Loss) | $ | 34 |  |  | $ | 40 |  |  | $ | 222 |  |  | $ | (1 | ) |  | $ | 1 |  |  | $ | (21 | ) |  | $ | 275 |
Add: Depreciation, depletion and amortization | 48 |  |  | 11 |  |  | 40 |  |  | 2 |  |  | — |  |  | 1 |  |  | 102 |
EBITDA | $ | 82 |  |  | $ | 51 |  |  | $ | 262 |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | (20 | ) |  | $ | 377 |
Nine Months Ended September 30, 2010 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income | $ | 26 |  |  | $ | 52 |  |  | $ | 152 |  |  | $ | 3 |  |  | $ | 1 |  |  | $ | (9 | ) |  | $ | 225 |
Add: Depreciation, depletion and amortization | 49 |  |  | 21 |  |  | 42 |  |  | 3 |  |  | — |  |  | 1 |  |  | 116 |
EBITDA | $ | 75 |  |  | $ | 73 |  |  | $ | 194 |  |  | $ | 6 |  |  | $ | 1 |  |  | $ | (8 | ) |  | $ | 341 |

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

| Nine Months Ended September 30,
| 2011 |  | 2010
Cash used for investing activities | $ | (181 | ) |  | $ | (103 | )
Cash used for financing activities | $ | (133 | ) |  | $ | (40 | )
Cash provided by operating activities | $ | 326 |  |  | $ | 473 |
Capital expenditures (a) | (87 | ) |  | (96 | )
Change in committed cash | — |  |  | 12 |
Excess tax benefits on stock-based compensation | 5 |  |  | 5 |
Other | (2 | ) |  | 6 |
CAD | 242 |  |  | 400 |
Mandatory debt repayments | — |  |  | — |
Adjusted CAD | $ | 242 |  |  | $ | 400 |

(a) Capital expenditures exclude strategic capital. Through September 30, 2011, strategic capital totaled $94 million for timberland acquisitions and $15 million for the Jesup mill cellulose specialties expansion.
Adjusted CAD was lower in 2011 due to the April 2010 receipt of $189 million related to the AFMC. Excluding this amount, 2011 adjusted CAD was $31 million higher than 2010 primarily due to improved operating results. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.
Liquidity Facilities
In April 2011, we entered into a five year $300 million unsecured revolving credit facility, replacing the previous $250 million credit facility which was scheduled to expire in August 2011. The new facility has a borrowing rate of LIBOR plus 105 basis points plus a facility fee of 20 basis points and expires in April 2016. In August 2011, we increased the revolving credit facility to $450 million from $300 million. The Company had $370 million of available borrowings under this facility at September 30, 2011.
Both our ability to obtain financing and the related costs of borrowing are affected by our credit ratings, which are periodically reviewed by the rating agencies. In February 2011, Standard & Poor's Ratings Services raised its credit rating on Rayonier to "BBB+" from "BBB". In April 2011, Moody's affirmed its "Baa2" senior unsecured ratings of Rayonier and raised its ratings outlook to “Positive” from “Stable.”
In connection with our installment notes and credit facility, covenants must be met, including ratios based on the covenant definition of EBITDA and ratios of cash flows to fixed charges. At September 30, 2011, we are in compliance with all of these covenants.
In addition to these financial covenants, the installment notes and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between RFR and Rayonier among others. An asset sales covenant in the RFR installment note-related agreements requires us, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments and activities or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. The amount of excess proceeds was $37.5 million and $27.2 million at September 30, 2011 and December 31, 2010, respectively.
Contractual Financial Obligations and Off-Balance Sheet Arrangements
We have no material changes to the Contractual Financial Obligations table as presented in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2010 Annual Report on Form 10-K. See Note 9 - Guarantees for details on the letters of credit, surety bonds and guarantees as of September 30, 2011.
New or Recently Adopted Accounting Pronouncements
For information on new or recently adopted accounting pronouncements, see Note 1 - Basis of Presentation and New Accounting Pronouncements.
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Sales Volumes by Segment:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2011 |  | 2010 |  | 2011 |  | 2010
Forest Resources — in thousands of short green tons |  |  |  |  |  |  |
Atlantic | 1,056 |  |  | 924 |  |  | 2,563 |  |  | 2,982 |
Gulf States | 301 |  |  | 326 |  |  | 946 |  |  | 1,125 |
Northern | 409 |  |  | 369 |  |  | 1,321 |  |  | 1,083 |
Total | 1,766 |  |  | 1,619 |  |  | 4,830 |  |  | 5,190 |
Real Estate—acres sold |  |  |  |  |  |  |
Development | 31 |  |  | 56 |  |  | 138 |  |  | 431 |
Rural | 2,946 |  |  | 10,242 |  |  | 12,411 |  |  | 15,192 |
Non-Strategic Timberlands | 6,814 |  |  | 12,912 |  |  | 8,040 |  |  | 43,134 |
Total Acres Sold | 9,791 |  |  | 23,210 |  |  | 20,589 |  |  | 58,757 |
Performance Fibers |  |  |  |  |  |  |
Sales volume — in thousands of metric tons |  |  |  |  |  |  |
Cellulose specialties | 127 |  |  | 131 |  |  | 363 |  |  | 357 |
Absorbent materials | 56 |  |  | 67 |  |  | 165 |  |  | 179 |
Total | 183 |  |  | 198 |  |  | 528 |  |  | 536 |
Wood Products |  |  |  |  |  |  |
Lumber sales volume — in millions of board feet | 66 |  |  | 60 |  |  | 192 |  |  | 180 |

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Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market and Other Economic Risks
Our exposures to market risk have not changed materially since December 31, 2010. For quantitative and qualitative disclosures about market risk, see Item 7A - Quantitative and Qualitative Disclosures about Market Risk in our 2010 Annual Report on Form 10-K.

Item 4. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), are designed with the objective of ensuring that information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance that their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the design and operation of the disclosure controls and procedures were effective as of September 30, 2011.
In the quarter ended September 30, 2011, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS

3.1 | Amended and Restated Articles of Incorporation | Incorporated by reference to Exhibit 3.1 to the Registrant's May 25, 2010 Form 8-K
3.2 | Bylaws | Incorporated by reference to Exhibit 3.2 to the Registrant's October 21, 2009 Form 8-K
10.1 | Rayonier Incentive Stock Plan, as ratified | Filed herewith
10.2 | Purchase and Sale Agreement dated as of September 16, 2011 between Joshua Timberlands LLC, as Seller and Rayonier Inc., as Buyer | Filed herewith
10.3 | Purchase and Sale Agreement dated as of September 16, 2011 between Oklahoma Timber, LLC, as Seller and Rayonier Inc., as Buyer | Filed herewith
10.4 | Incremental Assumption Agreement dated August 30, 2011 among Rayonier Inc., Rayonier TRS Holdings Inc., Rayonier Operating Company LLC and Rayonier Forest Resources, L.P., as Borrowers, Credit Suisse AG as Administrative Agent and Credit Suisse Securities (USA) LLC, as Sole Lead Arranger and Sole Bookrunner | Filed herewith
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith
31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act | Filed herewith
32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act | Furnished herewith
101 | The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2011, formatted in Extensible Business Reporting Language ("XBRL"), includes: (i) the Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2011 and 2010; (ii) the Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (iii) the Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010; and (iv) the Notes to Condensed Consolidated Financial Statements. | Furnished herewith pursuant to Rule 406T of Regulation S-T

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SIGNATURE
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: | /S/ HANS E. VANDEN NOORT
|  | Hans E. Vanden Noort Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

October 28, 2011
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