10-Q 1 rayonier201210q1q2012.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 March 31, 2012
OR

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

| For the transition period from to

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
As of April 17, 2012, there were outstanding 122,451,271 Common Shares of the registrant.

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 Months Ended March 31, 2012 and 201 1 | 1
|  | Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 201 1 | 2
|  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 201 1 | 3
|  | Notes to Condensed Consolidated Financial Statements | 4
2. |  | Management's Discussion and Analysis of Financial Condition and Results of Operations | 24
3. |  | Quantitative and Qualitative Disclosures about Market Risk | 31
4. |  | Controls and Procedures | 31
|  | PART II - OTHER INFORMATION |
2. |  | Unregistered Sales of Equity Securities and Use of Proceeds | 33
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 March 31,
| 2012 |  | 2011
SALES | $ | 355,780 |  |  | $ | 357,731 |
Costs and Expenses |  |  |
Cost of sales | 253,313 |  |  | 257,511 |
Selling and general expenses | 19,619 |  |  | 16,433 |
Other operating income, net | (1,148 | ) |  | (2,118 | )
| 271,784 |  |  | 271,826 |
Equity in income of New Zealand joint venture | 13 |  |  | 1,673 |
OPERATING INCOME | 84,009 |  |  | 87,578 |
Interest expense | (11,825 | ) |  | (13,317 | )
Interest and miscellaneous (expense) income, net | (23 | ) |  | 293 |
INCOME BEFORE INCOME TAXES | 72,161 |  |  | 74,554 |
Income tax expense | (18,724 | ) |  | (16,142 | )
NET INCOME | 53,437 |  |  | 58,412 |
OTHER COMPREHENSIVE INCOME (LOSS) |  |  |
Foreign currency translation adjustment | 5,825 |  |  | 288 |
New Zealand joint venture cash flow hedges | 1,205 |  |  | (567 | )
Amortization of gains/losses from pension and postretirement plans, net of income tax expense of $1,368 and $928 | 3,140 |  |  | 2,093 |
Total other comprehensive income | 10,170 |  |  | 1,814 |
COMPREHENSIVE INCOME | $ | 63,607 |  |  | $ | 60,226 |
EARNINGS PER COMMON SHARE (Note 2) |  |  |
Basic earnings per share | $ | 0.44 |  |  | $ | 0.48 |
Diluted earnings per share | $ | 0.42 |  |  | $ | 0.47 |
Dividends per share | $ | 0.40 |  |  | $ | 0.36 |

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

| March 31, 2012 |  | December 31, 2011
ASSETS
CURRENT ASSETS |  |  |
Cash and cash equivalents | $ | 236,575 |  |  | $ | 78,603 |
Accounts receivable, less allowance for doubtful accounts of $350 and $399 | 97,198 |  |  | 95,008 |
Inventory |  |  |
Finished goods | 80,457 |  |  | 96,261 |
Work in progress | 2,864 |  |  | 5,544 |
Raw materials | 16,922 |  |  | 18,295 |
Manufacturing and maintenance supplies | 2,074 |  |  | 1,898 |
Total inventory | 102,317 |  |  | 121,998 |
Prepaid and other current assets | 62,010 |  |  | 48,893 |
Total current assets | 498,100 |  |  | 344,502 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | 1,504,291 |  |  | 1,503,711 |
PROPERTY, PLANT AND EQUIPMENT |  |  |
Land | 26,952 |  |  | 26,917 |
Buildings | 144,018 |  |  | 140,269 |
Machinery and equipment | 1,350,939 |  |  | 1,355,897 |
Construction in progress | 157,376 |  |  | 96,097 |
Total property, plant and equipment, gross | 1,679,285 |  |  | 1,619,180 |
Less — accumulated depreciation | (1,157,275 | ) |  | (1,157,628 | )
Total property, plant and equipment, net | 522,010 |  |  | 461,552 |
INVESTMENT IN JOINT VENTURE (Note 5) | 74,388 |  |  | 69,219 |
OTHER ASSETS | 195,094 |  |  | 190,364 |
TOTAL ASSETS | $ | 2,793,883 |  |  | $ | 2,569,348 |
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES |  |  |
Accounts payable | $ | 100,681 |  |  | $ | 72,873 |
Current maturities of long-term debt | 50,512 |  |  | 28,110 |
Accrued taxes | 17,350 |  |  | 5,223 |
Accrued payroll and benefits | 20,322 |  |  | 26,846 |
Accrued interest | 11,075 |  |  | 7,044 |
Accrued customer incentives | 7,148 |  |  | 10,369 |
Other current liabilities | 16,064 |  |  | 17,855 |
Current liabilities for dispositions and discontinued operations (Note 10) | 9,931 |  |  | 9,931 |
Total current liabilities | 233,083 |  |  | 178,251 |
LONG-TERM DEBT | 973,717 |  |  | 819,229 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 10) | 79,194 |  |  | 80,893 |
PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 12) | 140,517 |  |  | 140,623 |
OTHER NON-CURRENT LIABILITIES | 24,987 |  |  | 27,279 |
COMMITMENTS AND CONTINGENCIES (Note 9 and 11) |  |  |
SHAREHOLDERS’ EQUITY |  |  |
Common Shares, 240,000,000 shares authorized, 122,450,771 and 122,035,177 shares issued and outstanding | 634,976 |  |  | 630,286 |
Retained earnings | 810,687 |  |  | 806,235 |
Accumulated other comprehensive loss | (103,278 | ) |  | (113,448 | )
TOTAL SHAREHOLDERS' EQUITY | 1,342,385 |  |  | 1,323,073 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 2,793,883 |  |  | $ | 2,569,348 |

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)

| Three Months Ended March 31,
| 2012 |  | 2011
OPERATING ACTIVITIES |  |  |
Net income | $ | 53,437 |  |  | $ | 58,412 |
Adjustments to reconcile net income to cash provided by operating activities: |  |  |
Depreciation, depletion and amortization | 31,168 |  |  | 31,870 |
Non-cash cost of real estate sold | 1,382 |  |  | 296 |
Stock-based incentive compensation expense | 6,466 |  |  | 4,275 |
Amortization of debt discount/premium | 1,890 |  |  | 2,152 |
Deferred income taxes | 3,028 |  |  | 7,345 |
Amortization of gains/losses from pension and postretirement plans | 4,508 |  |  | 3,021 |
Other | (1,909 | ) |  | (5,215 | )
Changes in operating assets and liabilities: |  |  |
Receivables | (1,911 | ) |  | (14,766 | )
Inventories | 17,035 |  |  | 9,161 |
Accounts payable | 3,978 |  |  | 14,644 |
All other operating activities | (6,007 | ) |  | 6,957 |
Expenditures for dispositions and discontinued operations | (1,711 | ) |  | (2,447 | )
CASH PROVIDED BY OPERATING ACTIVITIES | 111,354 |  |  | 115,705 |
INVESTING ACTIVITIES |  |  |
Capital expenditures | (42,079 | ) |  | (34,761 | )
Purchase of timberlands | (8,689 | ) |  | (2,942 | )
Jesup mill cellulose specialties expansion (gross purchases of $41,051, net of purchases on account of $15,025) | (26,026 | ) |  | — |
Change in restricted cash | (5,609 | ) |  | — |
Other | 8,736 |  |  | 6,882 |
CASH USED FOR INVESTING ACTIVITIES | (73,667 | ) |  | (30,821 | )
FINANCING ACTIVITIES |  |  |
Issuance of debt | 340,000 |  |  | — |
Repayment of debt | (165,000 | ) |  | (75,000 | )
Dividends paid | (49,249 | ) |  | (43,894 | )
Proceeds from the issuance of common shares | 2,061 |  |  | 5,399 |
Excess tax benefits on stock-based compensation | 3,946 |  |  | 3,970 |
Debt issuance costs | (3,565 | ) |  | — |
Repurchase of common shares | (7,783 | ) |  | (7,826 | )
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 120,410 |  |  | (117,351 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (125 | ) |  | 116 |
CASH AND CASH EQUIVALENTS |  |  |
Change in cash and cash equivalents | 157,972 |  |  | (32,351 | )
Balance, beginning of year | 78,603 |  |  | 349,463 |
Balance, end of period | $ | 236,575 |  |  | $ | 317,112 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |  |  |
Cash paid (received) during the period: |  |  |
Interest | $ | 5,213 |  |  | $ | 4,671 |
Income taxes | $ | 325 |  |  | $ | (5,892 | )
Non-cash investing activity: |  |  |
Capital assets purchased on account | $ | 44,576 |  |  | $ | 16,425 |

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

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

2. | EARNINGS PER COMMON SHARE

The impact of the August 24, 2011 three-for-two 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 March 31,
| 2012 |  | 2011
Net income | $ | 53,437 |  |  | $ | 58,412 |
Shares used for determining basic earnings per common share | 122,352,435 |  |  | 121,420,046 |
Dilutive effect of: |  |  |
Stock options | 719,166 |  |  | 715,043 |
Performance and restricted shares | 651,729 |  |  | 697,691 |
Assumed conversion of Senior Exchangeable Notes (a) (b) | 2,967,187 |  |  | 1,462,679 |
Assumed conversion of warrants (b) | 1,241,612 |  |  | — |
Shares used for determining diluted earnings per common share | 127,932,129 |  |  | 124,295,459 |
Basic earnings per common share | $ | 0.44 |  |  | $ | 0.48 |
Diluted earnings per common share | $ | 0.42 |  |  | $ | 0.47 |

| Three Months Ended March 31,
| 2012 |  | 2011
Anti-dilutive shares excluded from the computations of diluted earnings per share: |  |  |
Stock options, performance and restricted shares | 445,859 |  |  | 196,964 |
Assumed conversion of exchangeable note hedges (a) | 2,967,187 |  |  | 1,462,679 |
Total | 3,413,046 |  |  | 1,659,643 |

(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 Standards Codification 260, Earnings Per Share requires the assumed conversion of the Notes to be included in dilutive shares if the average stock price for the period exceeds the strike prices, while the assumed conversion of the hedges are excluded since they are anti-dilutive. Rayonier will distribute additional shares upon maturity of the warrants if the stock price exceeds the strike prices of $41.78 for the Notes due 2012 and $39.85 for the Notes due 2015. For additional information on the potential dilutive impact of the Senior Exchangeable Notes, warrants and exchangeable note hedges, see Note 11 — Debt in the 2011 Annual Report on Form 10-K and Note 13 — Debt of this Form 10-Q.
(b) The higher shares used for determining earnings per common share was primarily due to an increase in the average stock price from $39.71 in first quarter 2011 to $45.07 in first quarter 2012.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

3. | INCOME TAXES

Rayonier is a real estate investment trust ("REIT"). In general, only the taxable REIT subsidiaries, whose businesses include the Company's non-REIT qualified activities, are subject to corporate income taxes. However, the Company is subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010 and 2012 through 2013. In 2011, the law provided a built-in-gains tax holiday. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries' income and certain property sales.
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. Effective tax rates were 25.9 percent and 21.7 percent for the three months ended March 31, 2012 and 2011, respectively. The higher tax rate in 2012 was due to proportionately higher expected earnings from our taxable REIT subsidiaries.

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 March 31, 2012 and December 31, 2011, the Company had $5.6 million and $0.0 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

5. | JOINT VENTURE INVESTMENT

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

6. | SHAREHOLDERS’ EQUITY

An analysis of shareholders’ equity for the three months ended March 31, 2012 and the year ended December 31, 2011 is shown below (share amounts not in thousands):

| Common Shares |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Shareholders’ Equity
| Shares |  | Amount |
Balance, December 31, 2010 | 121,023,140 |  |  | $ | 602,882 |  |  | $ | 717,058 |  |  | $ | (68,358 | ) |  | $ | 1,251,582 |
Net income | — |  |  | — |  |  | 276,005 |  |  | — |  |  | 276,005 |
Dividends ($1.52 per share) | — |  |  | — |  |  | (186,828 | ) |  | — |  |  | (186,828 | )
Issuance of shares under incentive stock plans | 1,220,731 |  |  | 13,451 |  |  | — |  |  | — |  |  | 13,451 |
Stock-based compensation | — |  |  | 16,181 |  |  | — |  |  | — |  |  | 16,181 |
Excess tax benefit on stock-based compensation | — |  |  | 5,681 |  |  | — |  |  | — |  |  | 5,681 |
Repurchase of common shares | (208,694 | ) |  | (7,909 | ) |  | — |  |  | — |  |  | (7,909 | )
Net loss from pension and postretirement plans | — |  |  | — |  |  | — |  |  | (46,263 | ) |  | (46,263 | )
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | 3,546 |  |  | 3,546 |
Joint venture cash flow hedges | — |  |  | — |  |  | — |  |  | (2,373 | ) |  | (2,373 | )
Balance, December 31, 2011 | 122,035,177 |  |  | $ | 630,286 |  |  | $ | 806,235 |  |  | $ | (113,448 | ) |  | $ | 1,323,073 |
Net income | — |  |  | — |  |  | 53,437 |  |  | — |  |  | 53,437 |
Dividends ($0.40 per share) | — |  |  | — |  |  | (48,985 | ) |  | — |  |  | (48,985 | )
Issuance of shares under incentive stock plans | 585,351 |  |  | 2,061 |  |  | — |  |  | — |  |  | 2,061 |
Stock-based compensation | — |  |  | 6,466 |  |  | — |  |  | — |  |  | 6,466 |
Excess tax benefit on stock-based compensation | — |  |  | 3,946 |  |  | — |  |  | — |  |  | 3,946 |
Repurchase of common shares | (169,757 | ) |  | (7,783 | ) |  | — |  |  | — |  |  | (7,783 | )
Amortization of gains/losses from pension and postretirement plans | — |  |  | — |  |  | — |  |  | 3,140 |  |  | 3,140 |
Foreign currency translation adjustment | — |  |  | — |  |  | — |  |  | 5,825 |  |  | 5,825 |
Joint venture cash flow hedges | — |  |  | — |  |  | — |  |  | 1,205 |  |  | 1,205 |
Balance, March 31, 2012 | 122,450,771 |  |  | $ | 634,976 |  |  | $ | 810,687 |  |  | $ | (103,278 | ) |  | $ | 1,342,385 |

7. | SEGMENT AND GEOGRAPHICAL INFORMATION

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

| March 31, |  | December 31,
ASSETS | 2012 |  | 2011
Forest Resources | $ | 1,618,311 |  |  | $ | 1,603,515 |
Real Estate | 107,080 |  |  | 102,682 |
Performance Fibers | 706,260 |  |  | 646,447 |
Wood Products | 21,758 |  |  | 21,264 |
Other Operations | 23,456 |  |  | 24,576 |
Corporate and other | 317,018 |  |  | 170,864 |
Total | $ | 2,793,883 |  |  | $ | 2,569,348 |

| Three Months Ended March 31,
SALES | 2012 |  | 2011
Forest Resources | $ | 52,195 |  |  | $ | 48,180 |
Real Estate | 12,647 |  |  | 13,462 |
Performance Fibers | 250,855 |  |  | 251,163 |
Wood Products | 19,209 |  |  | 15,790 |
Other Operations | 21,140 |  |  | 30,412 |
Intersegment Eliminations (a) | (266 | ) |  | (1,276 | )
Total | $ | 355,780 |  |  | $ | 357,731 |

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

| Three Months Ended March 31,
OPERATING INCOME (LOSS) | 2012 |  | 2011
Forest Resources | $ | 8,005 |  |  | $ | 11,050 |
Real Estate | 6,478 |  |  | 7,372 |
Performance Fibers | 80,630 |  |  | 75,710 |
Wood Products | 923 |  |  | 453 |
Other Operations | (931 | ) |  | 799 |
Corporate and other | (11,096 | ) |  | (7,806 | )
Total | $ | 84,009 |  |  | $ | 87,578 |

| Three Months Ended March 31,
DEPRECIATION, DEPLETION AND AMORTIZATION | 2012 |  | 2011
Forest Resources | $ | 16,833 |  |  | $ | 15,404 |
Real Estate | 1,845 |  |  | 2,691 |
Performance Fibers | 11,361 |  |  | 12,715 |
Wood Products | 755 |  |  | 821 |
Corporate and other | 374 |  |  | 239 |
Total | $ | 31,168 |  |  | $ | 31,870 |

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

8. | FAIR VALUE MEASUREMENTS

Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at March 31, 2012 and December 31, 2011, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:

| March 31, 2012 |  | December 31, 2011
Asset (liability) | Carrying Amount |  | Fair Value |  | Carrying Amount |  | Fair Value
Cash and cash equivalents | $ | 236,575 |  |  | $ | 236,575 |  |  | $ | 78,603 |  |  | $ | 78,603 |
Current maturities of long-term debt | (50,512 | ) |  | (58,213 | ) |  | (28,110 | ) |  | (29,319 | )
Long-term debt | (973,717 | ) |  | (1,123,502 | ) |  | (819,229 | ) |  | (994,851 | )

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.
Assets measured at fair value on a recurring basis are summarized below:

Asset |  | Carrying Value at March 31, 2012 |  | Level 2 |  | Carrying Value at December 31, 2011 |  | Level 2
Investment in special-purpose entity |  | $ | 2,690 |  |  | $ | 2,690 |  |  | $ | 2,690 |  |  | $ | 2,690 |

The fair value of the investment in the special-purpose entity is determined by summing the discounted value of future principal and interest payments that Rayonier will receive from the special-purpose entity. The interest rate of a similar instrument is used to determine the discounted value of the payments.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

9. | GUARANTEES

The Company provides financial guarantees as required by creditors, insurance programs, and state and foreign governmental agencies. As of March 31, 2012, the following financial guarantees were outstanding:

Financial Commitments |  | Maximum Potential Payment |  | Carrying Amount of Liability
Standby letters of credit (a) | $ | 43,477 |  |  | $ | 38,110 |
Guarantees (b) |  | 2,555 |  |  | 43 |
Surety bonds (c) |  | 6,134 |  |  | 1,330 |
Total financial commitments | $ | 52,166 |  |  | $ | 39,483 |

(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 2012 and 2013 and will be renewed as required.

(b) | In conjunction with a timberland sale and note monetization in the first quarter of 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.6 million of obligations of a special-purpose entity that was established to complete the monetization. At March 31, 2012, the Company has a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.

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

10. | LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS

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

| March 31, |  | December 31, |
| 2012 |  | 2011 |
Balance, beginning of period | $ | 90,824 |  |  | $ | 93,160 |  |
Expenditures charged to liabilities | (1,711 | ) |  | (9,209 | ) |
Increase to liabilities | 12 |  |  | 6,873 |  |
Balance, end of period | 89,125 |  |  | 90,824 |  |
Less: Current portion | (9,931 | ) |  | (9,931 | ) |
Non-current portion | $ | 79,194 |  |  | $ | 80,893 |  |

The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of March 31, 2012, this amount could range up to $29 million, allocable over several of the applicable sites, and arises from uncertainty over the availability, feasibility or effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
The Company believes established liabilities are sufficient for 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 on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.

11. | CONTINGENCIES

Rayonier is engaged in various legal actions, including certain environmental proceedings, and has been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These other lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flow.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

12. | EMPLOYEE BENEFIT PLANS

The Company has four qualified non-contributory defined benefit pension plans covering a significant majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans. The Company closed enrollment in its pension plans to salaried employees hired after December 31, 2005, to Fernandina hourly employees hired after April 30, 2006, to Jesup hourly employees hired after March 4, 2009 and to Wood Products hourly employees hired after February 28, 2011. Currently, all plans are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recognized during the stated periods are shown in the following table:

| Pension | Postretirement
| Three Months Ended March 31, |  | Three Months Ended March 31,
| 2012 |  | 2011 |  | 2012 |  | 2011
Components of Net Periodic Benefit Cost |  |  |  |  |  |  |
Service cost | $ | 1,940 |  |  | $ | 1,695 |  |  | $ | 210 |  |  | $ | 182 |
Interest cost | 3,989 |  |  | 4,522 |  |  | 223 |  |  | 236 |
Expected return on plan assets | (5,879 | ) |  | (6,455 | ) |  | — |  |  | — |
Amortization of prior service cost | 302 |  |  | 340 |  |  | 6 |  |  | 22 |
Amortization of losses | 4,056 |  |  | 2,593 |  |  | 144 |  |  | 66 |
Net periodic benefit cost | $ | 4,408 |  |  | $ | 2,695 |  |  | $ | 583 |  |  | $ | 506 |

The Company made no discretionary contributions to the pension plans during the three months ended March 31, 2012. The Company has no mandatory pension contribution requirements for 2012, but may make discretionary contributions.

13. | DEBT

In March 2012, Rayonier issued $325 million of 3.75% Senior Notes due 2022. Approximately $150 million of the proceeds from these notes were used to repay borrowings outstanding under the Company's revolving credit facility. The Company had $445 million of available borrowings under the revolving credit facility at March 31, 2012.
As of March 31, 2012, the $172.5 million 4.50% Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending June 30, 2012. Per the indenture, in order for the notes to become exchangeable, the Company's stock price must exceed 130 percent of the exchange price for 20 trading days in a period of 30 consecutive trading days as of the last day of the quarter. Of the $172.5 million in principal, $145.1 million remained classified as long-term debt due to the ability and intent of the Company to refinance it on a long-term basis.
There were no other significant changes to the Company's outstanding debt as reported in Note 11 — Debt of the Company's 2011 Annual Report on Form 10-K.
Subsequent Event
An asset sales covenant in the Rayonier Forest Resources ("RFR") $112.5 million installment note agreement requires the Company, subject to certain exceptions, to either reinvest cumulative timberland sale proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. During April 2012, the excess proceeds exceeded the $50 million limit and as a result, repayment of $59.9 million has been offered to the note holders through May 15, 2012, at which time the excess proceeds will reset to zero.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

14. | ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated Other Comprehensive Loss was comprised of the following:

| March 31, 2012 |  | December 31, 2011
Foreign currency translation adjustments (a) | $ | 40,302 |  |  | $ | 34,477 |
Joint venture cash flow hedges | (2,636 | ) |  | (3,841 | )
Unrecognized components of employee benefit plans, net of tax | (140,944 | ) |  | (144,084 | )
Total | $ | (103,278 | ) |  | $ | (113,448 | )

(a) During the three months ended March 31, 2012, the increase in net foreign currency translation adjustments was due to the strengthening of the New Zealand dollar against the U.S. dollar.
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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

15. | CONSOLIDATING FINANCIAL STATEMENTS

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

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended March 31, 2012
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 335,438 |  |  | $ | 38,171 |  |  | $ | (17,829 | ) |  | $ | 355,780 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 247,054 |  |  | 26,818 |  |  | (20,559 | ) |  | 253,313 |
Selling and general expenses | — |  |  | 3,311 |  |  | — |  |  | 15,512 |  |  | 796 |  |  | — |  |  | 19,619 |
Other operating expense (income), net | — |  |  | 121 |  |  | — |  |  | 1,512 |  |  | (2,781 | ) |  | — |  |  | (1,148 | )
| — |  |  | 3,432 |  |  | — |  |  | 264,078 |  |  | 24,833 |  |  | (20,559 | ) |  | 271,784 |
Equity in income (loss) of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 171 |  |  | (158 | ) |  | — |  |  | 13 |
OPERATING (LOSS) INCOME | — |  |  | (3,432 | ) |  | — |  |  | 71,531 |  |  | 13,180 |  |  | 2,730 |  |  | 84,009 |
Interest expense | (1,249 | ) |  | (238 | ) |  | (10,226 | ) |  | 687 |  |  | (799 | ) |  | — |  |  | (11,825 | )
Interest and miscellaneous income (expense), net | 1,912 |  |  | 1,327 |  |  | (1,208 | ) |  | (3,904 | ) |  | 1,850 |  |  | — |  |  | (23 | )
Equity in income from subsidiaries | 52,774 |  |  | 55,446 |  |  | 45,745 |  |  | — |  |  | — |  |  | (153,965 | ) |  | — |
INCOME BEFORE INCOME TAXES | 53,437 |  |  | 53,103 |  |  | 34,311 |  |  | 68,314 |  |  | 14,231 |  |  | (151,235 | ) |  | 72,161 |
Income tax (expense) benefit | — |  |  | (329 | ) |  | 4,174 |  |  | (22,569 | ) |  | — |  |  | — |  |  | (18,724 | )
NET INCOME | $ | 53,437 |  |  | $ | 52,774 |  |  | $ | 38,485 |  |  | $ | 45,745 |  |  | $ | 14,231 |  |  | $ | (151,235 | ) |  | $ | 53,437 |
OTHER COMPREHENSIVE INCOME | 10,170 |  |  | 10,170 |  |  | 102 |  |  | 102 |  |  | 7,132 |  |  | (17,506 | ) |  | 10,170 |
COMPREHENSIVE INCOME | $ | 63,607 |  |  | $ | 62,944 |  |  | $ | 38,587 |  |  | $ | 45,847 |  |  | $ | 21,363 |  |  | $ | (168,741 | ) |  | $ | 63,607 |

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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 March 31, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 328,265 |  |  | $ | 42,833 |  |  | $ | (13,367 | ) |  | $ | 357,731 |
Costs and Expenses |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | — |  |  | — |  |  | 244,297 |  |  | 27,997 |  |  | (14,783 | ) |  | 257,511 |
Selling and general expenses | — |  |  | 2,716 |  |  | — |  |  | 13,070 |  |  | 647 |  |  | — |  |  | 16,433 |
Other operating expense (income), net | — |  |  | 49 |  |  | — |  |  | 298 |  |  | (2,464 | ) |  | (1 | ) |  | (2,118 | )
| — |  |  | 2,765 |  |  | — |  |  | 257,665 |  |  | 26,180 |  |  | (14,784 | ) |  | 271,826 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | — |  |  | 194 |  |  | 1,479 |  |  | — |  |  | 1,673 |
OPERATING (LOSS) INCOME | — |  |  | (2,765 | ) |  | — |  |  | 70,794 |  |  | 18,132 |  |  | 1,417 |  |  | 87,578 |
Interest expense | — |  |  | (130 | ) |  | (13,050 | ) |  | (112 | ) |  | (25 | ) |  | — |  |  | (13,317 | )
Interest and miscellaneous income (expense), net | — |  |  | 1,337 |  |  | (1,073 | ) |  | (5,024 | ) |  | 5,053 |  |  | — |  |  | 293 |
Equity in income from subsidiaries | 58,412 |  |  | 60,044 |  |  | 44,435 |  |  | — |  |  | — |  |  | (162,891 | ) |  | — |
INCOME BEFORE INCOME TAXES | 58,412 |  |  | 58,486 |  |  | 30,312 |  |  | 65,658 |  |  | 23,160 |  |  | (161,474 | ) |  | 74,554 |
Income tax (expense) benefit | — |  |  | (74 | ) |  | 5,155 |  |  | (21,223 | ) |  | — |  |  | — |  |  | (16,142 | )
NET INCOME | $ | 58,412 |  |  | $ | 58,412 |  |  | $ | 35,467 |  |  | $ | 44,435 |  |  | $ | 23,160 |  |  | $ | (161,474 | ) |  | $ | 58,412 |
OTHER COMPREHENSIVE INCOME (LOSS) | 1,814 |  |  | 1,814 |  |  | 149 |  |  | 149 |  |  | (191 | ) |  | (1,921 | ) |  | 1,814 |
COMPREHENSIVE INCOME | $ | 60,226 |  |  | $ | 60,226 |  |  | $ | 35,616 |  |  | $ | 44,584 |  |  | $ | 22,969 |  |  | $ | (163,395 | ) |  | $ | 60,226 |

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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 March 31, 2012
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 131,626 |  |  | $ | 27,671 |  |  | $ | 60,750 |  |  | $ | 8,520 |  |  | $ | 8,008 |  |  | $ | — |  |  | $ | 236,575 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | 24 |  |  | — |  |  | 94,699 |  |  | 2,475 |  |  | — |  |  | 97,198 |
Inventory | — |  |  | — |  |  | — |  |  | 110,274 |  |  | — |  |  | (7,957 | ) |  | 102,317 |
Intercompany interest receivable | — |  |  | — |  |  | — |  |  | — |  |  | 3,111 |  |  | (3,111 | ) |  | — |
Prepaid and other current assets | — |  |  | 974 |  |  | 796 |  |  | 53,540 |  |  | 6,700 |  |  | — |  |  | 62,010 |
Total current assets | 131,626 |  |  | 28,669 |  |  | 61,546 |  |  | 267,033 |  |  | 20,294 |  |  | (11,068 | ) |  | 498,100 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | — |  |  | — |  |  | 40,154 |  |  | 1,462,277 |  |  | 1,860 |  |  | 1,504,291 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 2,484 |  |  | — |  |  | 517,340 |  |  | 2,186 |  |  | — |  |  | 522,010 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | — |  |  | (11,281 | ) |  | 85,669 |  |  | — |  |  | 74,388 |
INVESTMENT IN SUBSIDIARIES | 1,328,752 |  |  | 1,524,491 |  |  | 1,202,519 |  |  | — |  |  | — |  |  | (4,055,762 | ) |  | — |
INTERCOMPANY NOTES RECEIVABLE | 204,420 |  |  | — |  |  | 19,262 |  |  | — |  |  | — |  |  | (223,682 | ) |  | — |
OTHER ASSETS | 3,535 |  |  | 26,802 |  |  | 5,750 |  |  | 699,073 |  |  | 12,469 |  |  | (552,535 | ) |  | 195,094 |
TOTAL ASSETS | $ | 1,668,333 |  |  | $ | 1,582,446 |  |  | $ | 1,289,077 |  |  | $ | 1,512,319 |  |  | $ | 1,582,895 |  |  | $ | (4,841,187 | ) |  | $ | 2,793,883 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 2,058 |  |  | $ | 9 |  |  | $ | 97,448 |  |  | $ | 1,166 |  |  | $ | — |  |  | $ | 100,681 |
Current maturities of long-term debt | — |  |  | — |  |  | 50,512 |  |  | — |  |  | — |  |  | — |  |  | 50,512 |
Accrued taxes | — |  |  | 525 |  |  | — |  |  | 14,188 |  |  | 2,637 |  |  | — |  |  | 17,350 |
Accrued payroll and benefits | — |  |  | 8,211 |  |  | — |  |  | 10,572 |  |  | 1,539 |  |  | — |  |  | 20,322 |
Accrued interest | 948 |  |  | 366 |  |  | 8,818 |  |  | 334 |  |  | 609 |  |  | — |  |  | 11,075 |
Accrued customer incentives | — |  |  | — |  |  | — |  |  | 7,148 |  |  | — |  |  | — |  |  | 7,148 |
Other current liabilities | — |  |  | 2,237 |  |  | — |  |  | 7,367 |  |  | 6,460 |  |  | — |  |  | 16,064 |
Current liabilities for dispositions and discontinued operations | — |  |  | — |  |  | — |  |  | 9,931 |  |  | — |  |  | — |  |  | 9,931 |
Total current liabilities | 948 |  |  | 13,397 |  |  | 59,339 |  |  | 146,988 |  |  | 12,411 |  |  | — |  |  | 233,083 |
LONG-TERM DEBT | 325,000 |  |  | — |  |  | 560,420 |  |  | — |  |  | 88,297 |  |  | — |  |  | 973,717 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | — |  |  | — |  |  | 79,194 |  |  | — |  |  | — |  |  | 79,194 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 113,491 |  |  | — |  |  | 27,026 |  |  | — |  |  | — |  |  | 140,517 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 17,557 |  |  | — |  |  | 6,809 |  |  | 621 |  |  | — |  |  | 24,987 |
INTERCOMPANY PAYABLE | — |  |  | 109,249 |  |  | — |  |  | 49,783 |  |  | 215,307 |  |  | (374,339 | ) |  | — |
TOTAL LIABILITIES | 325,948 |  |  | 253,694 |  |  | 619,759 |  |  | 309,800 |  |  | 316,636 |  |  | (374,339 | ) |  | 1,451,498 |
TOTAL SHAREHOLDERS’ EQUITY | 1,342,385 |  |  | 1,328,752 |  |  | 669,318 |  |  | 1,202,519 |  |  | 1,266,259 |  |  | (4,466,848 | ) |  | 1,342,385 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,668,333 |  |  | $ | 1,582,446 |  |  | $ | 1,289,077 |  |  | $ | 1,512,319 |  |  | $ | 1,582,895 |  |  | $ | (4,841,187 | ) |  | $ | 2,793,883 |

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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 December 31, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | — |  |  | $ | 8,977 |  |  | $ | 59,976 |  |  | $ | 7,398 |  |  | $ | 2,252 |  |  | $ | — |  |  | $ | 78,603 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | 3 |  |  | — |  |  | 94,399 |  |  | 606 |  |  | — |  |  | 95,008 |
Inventory | — |  |  | — |  |  | — |  |  | 133,300 |  |  | — |  |  | (11,302 | ) |  | 121,998 |
Intercompany interest receivable | — |  |  | — |  |  | — |  |  | — |  |  | 3,848 |  |  | (3,848 | ) |  | — |
Prepaid and other current assets | — |  |  | 2,328 |  |  | 808 |  |  | 36,937 |  |  | 8,820 |  |  | — |  |  | 48,893 |
Total current assets | — |  |  | 11,308 |  |  | 60,784 |  |  | 272,034 |  |  | 15,526 |  |  | (15,150 | ) |  | 344,502 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | — |  |  | — |  |  | 39,824 |  |  | 1,462,027 |  |  | 1,860 |  |  | 1,503,711 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 2,551 |  |  | — |  |  | 456,754 |  |  | 2,247 |  |  | — |  |  | 461,552 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | — |  |  | (11,006 | ) |  | 80,225 |  |  | — |  |  | 69,219 |
INVESTMENT IN SUBSIDIARIES | 1,238,661 |  |  | 1,490,444 |  |  | 1,156,896 |  |  | — |  |  | — |  |  | (3,886,001 | ) |  | — |
INTERCOMPANY NOTES RECEIVABLE | 204,420 |  |  | — |  |  | 19,073 |  |  | — |  |  | — |  |  | (223,493 | ) |  | — |
OTHER ASSETS | — |  |  | 26,850 |  |  | 6,491 |  |  | 702,087 |  |  | 6,856 |  |  | (551,920 | ) |  | 190,364 |
TOTAL ASSETS | $ | 1,443,081 |  |  | $ | 1,531,153 |  |  | $ | 1,243,244 |  |  | $ | 1,459,693 |  |  | $ | 1,566,881 |  |  | $ | (4,674,704 | ) |  | $ | 2,569,348 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 1,801 |  |  | $ | 10 |  |  | $ | 69,648 |  |  | $ | 1,414 |  |  | $ | — |  |  | $ | 72,873 |
Current maturities of long-term debt | — |  |  | — |  |  | 28,110 |  |  | — |  |  | — |  |  | — |  |  | 28,110 |
Accrued taxes | — |  |  | (27 | ) |  | — |  |  | 3,934 |  |  | 1,316 |  |  | — |  |  | 5,223 |
Accrued payroll and benefits | — |  |  | 13,810 |  |  | — |  |  | 10,563 |  |  | 2,473 |  |  | — |  |  | 26,846 |
Accrued interest | 8 |  |  | 246 |  |  | 5,442 |  |  | 739 |  |  | 609 |  |  | — |  |  | 7,044 |
Accrued customer incentives | — |  |  | — |  |  | — |  |  | 10,369 |  |  | — |  |  | — |  |  | 10,369 |
Other current liabilities | — |  |  | 1,886 |  |  | — |  |  | 9,199 |  |  | 6,770 |  |  | — |  |  | 17,855 |
Current liabilities for dispositions and discontinued operations | — |  |  | — |  |  | — |  |  | 9,931 |  |  | — |  |  | — |  |  | 9,931 |
Total current liabilities | 8 |  |  | 17,716 |  |  | 33,562 |  |  | 114,383 |  |  | 12,582 |  |  | — |  |  | 178,251 |
LONG-TERM DEBT | 120,000 |  |  | 30,000 |  |  | 580,647 |  |  | — |  |  | 88,582 |  |  | — |  |  | 819,229 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | — |  |  | — |  |  | 80,893 |  |  | — |  |  | — |  |  | 80,893 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 112,904 |  |  | — |  |  | 27,719 |  |  | — |  |  | — |  |  | 140,623 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 20,210 |  |  | — |  |  | 6,396 |  |  | 673 |  |  | — |  |  | 27,279 |
INTERCOMPANY PAYABLE | — |  |  | 111,662 |  |  | — |  |  | 73,406 |  |  | 203,208 |  |  | (388,276 | ) |  | — |
TOTAL LIABILITIES | 120,008 |  |  | 292,492 |  |  | 614,209 |  |  | 302,797 |  |  | 305,045 |  |  | (388,276 | ) |  | 1,246,275 |
TOTAL SHAREHOLDERS’ EQUITY | 1,323,073 |  |  | 1,238,661 |  |  | 629,035 |  |  | 1,156,896 |  |  | 1,261,836 |  |  | (4,286,428 | ) |  | 1,323,073 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,443,081 |  |  | $ | 1,531,153 |  |  | $ | 1,243,244 |  |  | $ | 1,459,693 |  |  | $ | 1,566,881 |  |  | $ | (4,674,704 | ) |  | $ | 2,569,348 |

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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 CASH FLOWS For the Three Months Ended March 31, 2012
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES | $ | (14,838 | ) |  | $ | 33,980 |  |  | $ | 12,000 |  |  | $ | 61,546 |  |  | $ | 44,070 |  |  | $ | (25,404 | ) |  | $ | 111,354 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (55 | ) |  | — |  |  | (33,158 | ) |  | (8,866 | ) |  | — |  |  | (42,079 | )
Purchase of timberlands | — |  |  | — |  |  | — |  |  | — |  |  | (8,689 | ) |  | — |  |  | (8,689 | )
Jesup mill cellulose specialties expansion | — |  |  | — |  |  | — |  |  | (26,026 | ) |  | — |  |  | — |  |  | (26,026 | )
Change in restricted cash | — |  |  | — |  |  | — |  |  | — |  |  | (5,609 | ) |  | — |  |  | (5,609 | )
Investment in Subsidiaries | — |  |  | — |  |  | 774 |  |  | — |  |  | — |  |  | (774 | ) |  | — |
Other | — |  |  | (69 | ) |  | — |  |  | 8,955 |  |  | (150 | ) |  | — |  |  | 8,736 |
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | — |  |  | (124 | ) |  | 774 |  |  | (50,229 | ) |  | (23,314 | ) |  | (774 | ) |  | (73,667 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Issuance of debt | 325,000 |  |  | — |  |  | — |  |  | — |  |  | 15,000 |  |  | — |  |  | 340,000 |
Repayment of debt | (120,000 | ) |  | (30,000 | ) |  | — |  |  | — |  |  | (15,000 | ) |  | — |  |  | (165,000 | )
Dividends paid | (49,249 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (49,249 | )
Proceeds from the issuance of common shares | 2,061 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,061 |
Excess tax benefits on stock-based compensation | — |  |  | — |  |  | — |  |  | 3,946 |  |  | — |  |  | — |  |  | 3,946 |
Debt issuance costs | (3,565 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (3,565 | )
Repurchase of common shares | (7,783 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,783 | )
Intercompany distributions | — |  |  | 14,838 |  |  | (12,000 | ) |  | (14,016 | ) |  | (15,000 | ) |  | 26,178 |  |  | — |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 146,464 |  |  | (15,162 | ) |  | (12,000 | ) |  | (10,070 | ) |  | (15,000 | ) |  | 26,178 |  |  | 120,410 |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | — |  |  | (125 | ) |  | — |  |  | — |  |  | (125 | )
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | 131,626 |  |  | 18,694 |  |  | 774 |  |  | 1,122 |  |  | 5,756 |  |  | — |  |  | 157,972 |
Balance, beginning of year | — |  |  | 8,977 |  |  | 59,976 |  |  | 7,398 |  |  | 2,252 |  |  | — |  |  | 78,603 |
Balance, end of period | $ | 131,626 |  |  | $ | 27,671 |  |  | $ | 60,750 |  |  | $ | 8,520 |  |  | $ | 8,008 |  |  | $ | — |  |  | $ | 236,575 |

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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 CASH FLOWS For the Three Months Ended March 31, 2011
| Rayonier Inc. (Parent Guarantor) |  | ROC (Subsidiary Guarantor) |  | Rayonier TRS Holdings Inc. (Issuer) |  | Subsidiaries of Rayonier TRS Holdings Inc. (Non- guarantors) |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 46,321 |  |  | $ | 26,146 |  |  | $ | 15,000 |  |  | $ | 69,566 |  |  | $ | 36,292 |  |  | $ | (77,620 | ) |  | $ | 115,705 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (62 | ) |  | — |  |  | (24,701 | ) |  | (9,998 | ) |  | — |  |  | (34,761 | )
Purchase of timberlands | — |  |  | — |  |  | — |  |  | — |  |  | (2,942 | ) |  | — |  |  | (2,942 | )
Investment in Subsidiaries | — |  |  | — |  |  | 26,011 |  |  | — |  |  | — |  |  | (26,011 | ) |  | — |
Other | — |  |  | — |  |  | — |  |  | 6,107 |  |  | 775 |  |  | — |  |  | 6,882 |
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | — |  |  | (62 | ) |  | 26,011 |  |  | (18,594 | ) |  | (12,165 | ) |  | (26,011 | ) |  | (30,821 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |  |  |  |  |
Repayment of debt | — |  |  | — |  |  | (75,000 | ) |  | — |  |  | — |  |  | — |  |  | (75,000 | )
Dividends paid | (43,894 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (43,894 | )
Proceeds from the issuance of common shares | 5,399 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 5,399 |
Excess tax benefits on stock-based compensation | — |  |  | — |  |  | — |  |  | 3,970 |  |  | — |  |  | — |  |  | 3,970 |
Repurchase of common shares | (7,826 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (7,826 | )
Intercompany distributions | — |  |  | (46,321 | ) |  | (15,000 | ) |  | (42,310 | ) |  | — |  |  | 103,631 |  |  | — |
CASH USED FOR FINANCING ACTIVITIES | (46,321 | ) |  | (46,321 | ) |  | (90,000 | ) |  | (38,340 | ) |  | — |  |  | 103,631 |  |  | (117,351 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | — |  |  | 116 |  |  | — |  |  | — |  |  | 116 |
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | — |  |  | (20,237 | ) |  | (48,989 | ) |  | 12,748 |  |  | 24,127 |  |  | — |  |  | (32,351 | )
Balance, beginning of year | — |  |  | 29,759 |  |  | 283,258 |  |  | 1,280 |  |  | 35,166 |  |  | — |  |  | 349,463 |
Balance, end of period | $ | — |  |  | $ | 9,522 |  |  | $ | 234,269 |  |  | $ | 14,028 |  |  | $ | 59,293 |  |  | $ | — |  |  | $ | 317,112 |

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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)
In March 2012, Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022. The notes are fully and unconditionally guaranteed by the following subsidiaries of Rayonier Inc.: ROC, Rayonier Louisiana Timberlands LLC, Rayonier TRS Holdings Inc. and substantially all domestic subsidiaries of TRS Holdings Inc. In connection with these notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.

| CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the Three Months Ended March 31, 2012
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | 312,642 |  |  | $ | 60,967 |  |  | $ | (17,829 | ) |  | $ | 355,780 |
Costs and Expenses |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | 227,508 |  |  | 46,364 |  |  | (20,559 | ) |  | 253,313 |
Selling and general expenses | — |  |  | 15,698 |  |  | 3,921 |  |  | — |  |  | 19,619 |
Other operating expense (income), net | — |  |  | 980 |  |  | (2,128 | ) |  | — |  |  | (1,148 | )
| — |  |  | 244,186 |  |  | 48,157 |  |  | (20,559 | ) |  | 271,784 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | 13 |  |  | — |  |  | 13 |
OPERATING INCOME | — |  |  | 68,456 |  |  | 12,823 |  |  | 2,730 |  |  | 84,009 |
Interest expense | (1,249 | ) |  | (9,778 | ) |  | (798 | ) |  | — |  |  | (11,825 | )
Interest and miscellaneous income (expense), net | 1,912 |  |  | (3,789 | ) |  | 1,854 |  |  | — |  |  | (23 | )
Equity in income from subsidiaries | 52,774 |  |  | 16,655 |  |  | — |  |  | (69,429 | ) |  | — |
INCOME BEFORE INCOME TAXES | 53,437 |  |  | 71,544 |  |  | 13,879 |  |  | (66,699 | ) |  | 72,161 |
Income tax (expense) benefit | — |  |  | (18,770 | ) |  | 46 |  |  | — |  |  | (18,724 | )
NET INCOME | $ | 53,437 |  |  | $ | 52,774 |  |  | $ | 13,925 |  |  | $ | (66,699 | ) |  | $ | 53,437 |
OTHER COMPREHENSIVE INCOME | 10,170 |  |  | 10,170 |  |  | 7,030 |  |  | (17,200 | ) |  | 10,170 |
COMPREHENSIVE INCOME | $ | 63,607 |  |  | $ | 62,944 |  |  | $ | 20,955 |  |  | $ | (83,899 | ) |  | $ | 63,607 |

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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 March 31, 2011
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
SALES | $ | — |  |  | $ | 296,251 |  |  | $ | 74,847 |  |  | $ | (13,367 | ) |  | $ | 357,731 |
Costs and Expenses |  |  |  |  |  |  |  |  |
Cost of sales | — |  |  | 215,566 |  |  | 56,728 |  |  | (14,783 | ) |  | 257,511 |
Selling and general expenses | — |  |  | 12,769 |  |  | 3,664 |  |  | — |  |  | 16,433 |
Other operating expense (income), net | — |  |  | 1,060 |  |  | (3,177 | ) |  | (1 | ) |  | (2,118 | )
| — |  |  | 229,395 |  |  | 57,215 |  |  | (14,784 | ) |  | 271,826 |
Equity in income of New Zealand joint venture | — |  |  | — |  |  | 1,673 |  |  | — |  |  | 1,673 |
OPERATING INCOME | — |  |  | 66,856 |  |  | 19,305 |  |  | 1,417 |  |  | 87,578 |
Interest expense | — |  |  | (13,292 | ) |  | (25 | ) |  | — |  |  | (13,317 | )
Interest and miscellaneous (expense) income, net | — |  |  | (4,762 | ) |  | 5,055 |  |  | — |  |  | 293 |
Equity in income from subsidiaries | 58,412 |  |  | 25,374 |  |  | — |  |  | (83,786 | ) |  | — |
INCOME BEFORE INCOME TAXES | 58,412 |  |  | 74,176 |  |  | 24,335 |  |  | (82,369 | ) |  | 74,554 |
Income tax expense | — |  |  | (15,764 | ) |  | (378 | ) |  | — |  |  | (16,142 | )
NET INCOME | $ | 58,412 |  |  | $ | 58,412 |  |  | $ | 23,957 |  |  | $ | (82,369 | ) |  | $ | 58,412 |
OTHER COMPREHENSIVE INCOME (LOSS) | 1,814 |  |  | 1,814 |  |  | (281 | ) |  | (1,533 | ) |  | 1,814 |
COMPREHENSIVE INCOME | $ | 60,226 |  |  | $ | 60,226 |  |  | $ | 23,676 |  |  | $ | (83,902 | ) |  | $ | 60,226 |

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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 March 31, 2012
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 131,626 |  |  | $ | 83,099 |  |  | $ | 21,850 |  |  | $ | — |  |  | $ | 236,575 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | 89,582 |  |  | 7,616 |  |  | — |  |  | 97,198 |
Inventory | — |  |  | 109,244 |  |  | 1,030 |  |  | (7,957 | ) |  | 102,317 |
Intercompany interest receivable | — |  |  | — |  |  | 3,111 |  |  | (3,111 | ) |  | — |
Prepaid and other current assets | — |  |  | 54,679 |  |  | 7,331 |  |  | — |  |  | 62,010 |
Total current assets | 131,626 |  |  | 336,604 |  |  | 40,938 |  |  | (11,068 | ) |  | 498,100 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | 116,728 |  |  | 1,385,703 |  |  | 1,860 |  |  | 1,504,291 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 518,933 |  |  | 3,077 |  |  | — |  |  | 522,010 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | 74,388 |  |  | — |  |  | 74,388 |
INVESTMENT IN SUBSIDIARIES | 1,328,752 |  |  | 796,030 |  |  | — |  |  | (2,124,782 | ) |  | — |
INTERCOMPANY NOTES RECEIVABLE | 204,420 |  |  | — |  |  | — |  |  | (204,420 | ) |  | — |
OTHER ASSETS | 3,535 |  |  | 706,429 |  |  | 37,666 |  |  | (552,536 | ) |  | 195,094 |
TOTAL ASSETS | $ | 1,668,333 |  |  | $ | 2,474,724 |  |  | $ | 1,541,772 |  |  | $ | (2,890,946 | ) |  | $ | 2,793,883 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 97,059 |  |  | $ | 3,622 |  |  | $ | — |  |  | $ | 100,681 |
Current maturities of long-term debt | — |  |  | 50,512 |  |  | — |  |  | — |  |  | 50,512 |
Accrued taxes | — |  |  | 14,736 |  |  | 2,614 |  |  | — |  |  | 17,350 |
Accrued payroll and benefits | — |  |  | 18,065 |  |  | 2,257 |  |  | — |  |  | 20,322 |
Accrued interest | 948 |  |  | 9,518 |  |  | 609 |  |  | — |  |  | 11,075 |
Accrued customer incentives | — |  |  | 7,148 |  |  | — |  |  | — |  |  | 7,148 |
Other current liabilities | — |  |  | 8,700 |  |  | 7,364 |  |  | — |  |  | 16,064 |
Current liabilities for dispositions and discontinued operations | — |  |  | 9,931 |  |  | — |  |  | — |  |  | 9,931 |
Total current liabilities | 948 |  |  | 215,669 |  |  | 16,466 |  |  | — |  |  | 233,083 |
LONG-TERM DEBT | 325,000 |  |  | 560,420 |  |  | 88,297 |  |  | — |  |  | 973,717 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | 79,194 |  |  | — |  |  | — |  |  | 79,194 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 140,517 |  |  | — |  |  | — |  |  | 140,517 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 23,554 |  |  | 1,433 |  |  | — |  |  | 24,987 |
INTERCOMPANY PAYABLE | — |  |  | 126,618 |  |  | 228,460 |  |  | (355,078 | ) |  | — |
TOTAL LIABILITIES | 325,948 |  |  | 1,145,972 |  |  | 334,656 |  |  | (355,078 | ) |  | 1,451,498 |
TOTAL SHAREHOLDERS’ EQUITY | 1,342,385 |  |  | 1,328,752 |  |  | 1,207,116 |  |  | (2,535,868 | ) |  | 1,342,385 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,668,333 |  |  | $ | 2,474,724 |  |  | $ | 1,541,772 |  |  | $ | (2,890,946 | ) |  | $ | 2,793,883 |

20

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, 2011
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
ASSETS |  |  |  |  |  |  |  |  |
CURRENT ASSETS |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | — |  |  | $ | 58,132 |  |  | $ | 20,471 |  |  | $ | — |  |  | $ | 78,603 |
Accounts receivable, less allowance for doubtful accounts | — |  |  | 90,658 |  |  | 4,350 |  |  | — |  |  | 95,008 |
Inventory | — |  |  | 132,323 |  |  | 977 |  |  | (11,302 | ) |  | 121,998 |
Intercompany interest receivable | — |  |  | — |  |  | 3,848 |  |  | (3,848 | ) |  | — |
Prepaid and other current assets | — |  |  | 39,366 |  |  | 9,527 |  |  | — |  |  | 48,893 |
Total current assets | — |  |  | 320,479 |  |  | 39,173 |  |  | (15,150 | ) |  | 344,502 |
TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION | — |  |  | 117,243 |  |  | 1,384,608 |  |  | 1,860 |  |  | 1,503,711 |
NET PROPERTY, PLANT AND EQUIPMENT | — |  |  | 458,497 |  |  | 3,055 |  |  | — |  |  | 461,552 |
INVESTMENT IN JOINT VENTURE | — |  |  | — |  |  | 69,219 |  |  | — |  |  | 69,219 |
INVESTMENT IN SUBSIDIARIES | 1,238,661 |  |  | 801,838 |  |  | — |  |  | (2,040,499 | ) |  | — |
INTERCOMPANY NOTES RECEIVABLE | 204,420 |  |  | — |  |  | — |  |  | (204,420 | ) |  | — |
OTHER ASSETS | — |  |  | 710,663 |  |  | 31,622 |  |  | (551,921 | ) |  | 190,364 |
TOTAL ASSETS | $ | 1,443,081 |  |  | $ | 2,408,720 |  |  | $ | 1,527,677 |  |  | $ | (2,810,130 | ) |  | $ | 2,569,348 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |  |  |  |  |  |  |  |  |
CURRENT LIABILITIES |  |  |  |  |  |  |  |  |
Accounts payable | $ | — |  |  | $ | 65,732 |  |  | $ | 7,141 |  |  | $ | — |  |  | $ | 72,873 |
Current maturities of long-term debt | — |  |  | 28,110 |  |  | — |  |  | — |  |  | 28,110 |
Accrued taxes | — |  |  | 3,838 |  |  | 1,385 |  |  | — |  |  | 5,223 |
Accrued payroll and benefits | — |  |  | 23,070 |  |  | 3,776 |  |  | — |  |  | 26,846 |
Accrued interest | 8 |  |  | 6,427 |  |  | 609 |  |  | — |  |  | 7,044 |
Accrued customer incentives | — |  |  | 10,369 |  |  | — |  |  | — |  |  | 10,369 |
Other current liabilities | — |  |  | 10,319 |  |  | 7,536 |  |  | — |  |  | 17,855 |
Current liabilities for dispositions and discontinued operations | — |  |  | 9,931 |  |  | — |  |  | — |  |  | 9,931 |
Total current liabilities | 8 |  |  | 157,796 |  |  | 20,447 |  |  | — |  |  | 178,251 |
LONG-TERM DEBT | 120,000 |  |  | 610,647 |  |  | 88,582 |  |  | — |  |  | 819,229 |
NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS | — |  |  | 80,893 |  |  | — |  |  | — |  |  | 80,893 |
PENSION AND OTHER POSTRETIREMENT BENEFITS | — |  |  | 140,623 |  |  | — |  |  | — |  |  | 140,623 |
OTHER NON-CURRENT LIABILITIES | — |  |  | 25,894 |  |  | 1,385 |  |  | — |  |  | 27,279 |
INTERCOMPANY PAYABLE | — |  |  | 154,206 |  |  | 214,997 |  |  | (369,203 | ) |  | — |
TOTAL LIABILITIES | 120,008 |  |  | 1,170,059 |  |  | 325,411 |  |  | (369,203 | ) |  | 1,246,275 |
TOTAL SHAREHOLDERS’ EQUITY | 1,323,073 |  |  | 1,238,661 |  |  | 1,202,266 |  |  | (2,440,927 | ) |  | 1,323,073 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,443,081 |  |  | $ | 2,408,720 |  |  | $ | 1,527,677 |  |  | $ | (2,810,130 | ) |  | $ | 2,569,348 |

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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 CASH FLOWS For the Three Months Ended March 31, 2012
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES | $ | (14,838 | ) |  | $ | 86,628 |  |  | $ | 39,726 |  |  | $ | (162 | ) |  | $ | 111,354 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (33,204 | ) |  | (8,875 | ) |  | — |  |  | (42,079 | )
Purchase of timberlands | — |  |  | (102 | ) |  | (8,587 | ) |  | — |  |  | (8,689 | )
Jesup mill cellulose specialties expansion | — |  |  | (26,026 | ) |  | — |  |  | — |  |  | (26,026 | )
Change in restricted cash | — |  |  | — |  |  | (5,609 | ) |  | — |  |  | (5,609 | )
Other | — |  |  | 8,887 |  |  | (151 | ) |  | — |  |  | 8,736 |
CASH USED FOR INVESTING ACTIVITIES | — |  |  | (50,445 | ) |  | (23,222 | ) |  | — |  |  | (73,667 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |
Issuance of debt | 325,000 |  |  | — |  |  | 15,000 |  |  | — |  |  | 340,000 |
Repayment of debt | (120,000 | ) |  | (30,000 | ) |  | (15,000 | ) |  | — |  |  | (165,000 | )
Dividends paid | (49,249 | ) |  | — |  |  | — |  |  | — |  |  | (49,249 | )
Proceeds from the issuance of common shares | 2,061 |  |  | — |  |  | — |  |  | — |  |  | 2,061 |
Excess tax benefits on stock-based compensation | — |  |  | 3,946 |  |  | — |  |  | — |  |  | 3,946 |
Debt issuance costs | (3,565 | ) |  | — |  |  | — |  |  | — |  |  | (3,565 | )
Repurchase of common shares | (7,783 | ) |  | — |  |  | — |  |  | — |  |  | (7,783 | )
Intercompany distributions | — |  |  | 14,838 |  |  | (15,000 | ) |  | 162 |  |  | — |
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES | 146,464 |  |  | (11,216 | ) |  | (15,000 | ) |  | 162 |  |  | 120,410 |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | (125 | ) |  | — |  |  | (125 | )
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | 131,626 |  |  | 24,967 |  |  | 1,379 |  |  | — |  |  | 157,972 |
Balance, beginning of year | — |  |  | 58,132 |  |  | 20,471 |  |  | — |  |  | 78,603 |
Balance, end of period | $ | 131,626 |  |  | $ | 83,099 |  |  | $ | 21,850 |  |  | $ | — |  |  | $ | 236,575 |

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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 CASH FLOWS For the Three Months Ended March 31, 2011
| Rayonier Inc. (Parent Issuer) |  | Subsidiary Guarantors |  | All Other Subsidiaries (Non- guarantors) |  | Consolidating Adjustments |  | Total Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES | $ | 46,321 |  |  | $ | 73,960 |  |  | $ | 41,745 |  |  | $ | (46,321 | ) |  | $ | 115,705 |
INVESTING ACTIVITIES |  |  |  |  |  |  |  |  |
Capital expenditures | — |  |  | (24,759 | ) |  | (10,002 | ) |  | — |  |  | (34,761 | )
Purchase of timberlands | — |  |  | — |  |  | (2,942 | ) |  | — |  |  | (2,942 | )
Other | — |  |  | 6,107 |  |  | 775 |  |  | — |  |  | 6,882 |
CASH USED FOR INVESTING ACTIVITIES | — |  |  | (18,652 | ) |  | (12,169 | ) |  | — |  |  | (30,821 | )
FINANCING ACTIVITIES |  |  |  |  |  |  |  |  |
Repayment of debt | — |  |  | (75,000 | ) |  | — |  |  | — |  |  | (75,000 | )
Dividends paid | (43,894 | ) |  | — |  |  | — |  |  | — |  |  | (43,894 | )
Proceeds from the issuance of common shares | 5,399 |  |  | — |  |  | — |  |  | — |  |  | 5,399 |
Excess tax benefits on stock-based compensation | — |  |  | 3,970 |  |  | — |  |  | — |  |  | 3,970 |
Repurchase of common shares | (7,826 | ) |  | — |  |  | — |  |  | — |  |  | (7,826 | )
Intercompany distributions | — |  |  | (46,321 | ) |  | — |  |  | 46,321 |  |  | — |
CASH USED FOR FINANCING ACTIVITIES | (46,321 | ) |  | (117,351 | ) |  | — |  |  | 46,321 |  |  | (117,351 | )
EFFECT OF EXCHANGE RATE CHANGES ON CASH | — |  |  | — |  |  | 116 |  |  | — |  |  | 116 |
CASH AND CASH EQUIVALENTS |  |  |  |  |  |  |  |  |
Change in cash and cash equivalents | — |  |  | (62,043 | ) |  | 29,692 |  |  | — |  |  | (32,351 | )
Balance, beginning of year | — |  |  | 303,746 |  |  | 45,717 |  |  | — |  |  | 349,463 |
Balance, end of period | $ | — |  |  | $ | 241,703 |  |  | $ | 75,409 |  |  | $ | — |  |  | $ | 317,112 |

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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 2011 Annual Report on Form 10-K.
Forward-Looking Statements
Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook and other similar statements relating to Rayonier's future financial and operational performance, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as "may," "will," "should," "expect," "estimate," "believe," "anticipate" and other similar language. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on these statements. The risk factors contained in Item 1A — Risk Factors in our 2011 Annual Report on Form 10-K, among others, could cause actual results to differ materially from those expressed in forward-looking statements that are made in this document.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward- looking statements except as required by law. You are advised, however, to review any further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2011 Annual Report on Form 10-K.
Segments
We are a leading international forest products company primarily engaged in timberland management, the sale and entitlement of real estate, and the production and sale of high value specialty cellulose fibers and fluff pulp. We operate in four reportable business segments: Forest Resources, Real Estate, Performance Fibers, and Wood Products. Forest Resources sales include all activities which relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use ("HBU"). The assets of the Real Estate segment include HBU property held by our real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Wood Products segment is comprised of lumber operations. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in "Other Operations." Sales between operating segments are made based on 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 March 31,
Financial Information (in millions) | 2012 |  | 2011
Sales |  |  |
Forest Resources |  |  |
Atlantic | $ | 15 |  |  | $ | 13 |
Gulf States | 10 |  |  | 8 |
Northern | 24 |  |  | 24 |
New Zealand | 3 |  |  | 3 |
Total Forest Resources | 52 |  |  | 48 |
Real Estate |  |  |
Development | — |  |  | — |
Rural | 11 |  |  | 12 |
Non-Strategic Timberlands | 1 |  |  | 1 |
Total Real Estate | 12 |  |  | 13 |
Performance Fibers |  |  |
Cellulose specialties | 212 |  |  | 194 |
Absorbent materials | 39 |  |  | 57 |
Total Performance Fibers | 251 |  |  | 251 |
Wood Products | 19 |  |  | 16 |
Other Operations | 22 |  |  | 30 |
Total Sales | $ | 356 |  |  | $ | 358 |
Operating Income (Loss) |  |  |
Forest Resources | $ | 8 |  |  | $ | 11 |
Real Estate | 6 |  |  | 7 |
Performance Fibers | 81 |  |  | 76 |
Wood Products | 1 |  |  | — |
Other Operations | (1 | ) |  | 1 |
Corporate and other | (11 | ) |  | (7 | )
Operating Income | 84 |  |  | 88 |
Interest Expense, Interest Income and Other | (12 | ) |  | (14 | )
Income Tax Expense | (19 | ) |  | (16 | )
Net Income | $ | 53 |  |  | $ | 58 |
Diluted Earnings Per Share | $ | 0.42 |  |  | $ | 0.47 |

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FOREST RESOURCES

Sales (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume/ Mix/Other |
Atlantic | $ | 13 |  |  | $ | — |  |  | $ | 2 |  |  | $ | 15 |
Gulf States | 8 |  |  | (1 | ) |  | 3 |  |  | 10 |
Northern | 24 |  |  | — |  |  | — |  |  | 24 |
New Zealand | 3 |  |  | — |  |  | — |  |  | 3 |
Total Sales | $ | 48 |  |  | $ | (1 | ) |  | $ | 5 |  |  | $ | 52 |

Operating Income (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume/Mix/Cost |
Atlantic | $ | 2 |  |  | $ | — |  |  | $ | 1 |  |  | $ | 3 |
Gulf States | — |  |  | (1 | ) |  | 2 |  |  | 1 |
Northern | 8 |  |  | — |  |  | (4 | ) |  | 4 |
New Zealand/Other | 1 |  |  | — |  |  | (1 | ) |  | — |
Total Operating Income | $ | 11 |  |  | $ | (1 | ) |  | $ | (2 | ) |  | $ | 8 |

The Atlantic region's sales and operating income increased by $2 million and $1 million from the prior year period, respectively, as volumes increased 14 percent due to higher pulpwood demand.
In the Gulf States region, results improved from first quarter 2011 as volumes rose 28 percent mainly due to the 2011 timberland acquisitions, partially offset by a six percent decline in average prices due to a mix shift to pulpwood from sawlogs.
In the Northern region, first quarter sales were consistent with 2011, while operating income declined reflecting higher fuel and logging costs. As expected, high inventories at China ports resulted in lower stumpage sales for export markets; however, an increase in log volumes for domestic mills offset this volume decline.
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, which declined in 2012 mainly due to lower export demand due to high inventory levels at China ports.
REAL ESTATE
Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: development HBU, rural HBU and non-strategic timberlands. Our strategy is to extract maximum value from our HBU properties. We pursue entitlement activity on development property while maintaining a rural HBU program of sales for conservation, recreation and industrial uses.

Sales (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price/Volume/Mix |
Development | $ | — |  |  | $ | — |  |  | $ | — |
Rural | 12 |  |  | (1 | ) |  | 11 |
Non-Strategic Timberlands | 1 |  |  | — |  |  | 1 |
Total Sales | $ | 13 |  |  | $ | (1 | ) |  | $ | 12 |

Operating Income (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price/Volume/Mix |
Total Operating Income | $ | 7 |  |  | $ | (1 | ) |  | $ | 6 |

Real Estate sales of $12 million and operating income of $6 million both declined $1 million from the prior year period. In first quarter 2012, rural acres sold of 5,452 were comparable to the prior year period, while price and cost per acre were slightly unfavorable due to geographic mix.
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PERFORMANCE FIBERS

Sales (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume/ Mix |
Cellulose specialties | $ | 194 |  |  | $ | 26 |  |  | $ | (8 | ) |  | $ | 212 |
Absorbent materials | 57 |  |  | (8 | ) |  | (10 | ) |  | 39 |
Total Sales | $ | 251 |  |  | $ | 18 |  |  | $ | (18 | ) |  | $ | 251 |

Cellulose specialties sales improved in 2012 versus prior year as prices increased 14 percent reflecting strong demand. Cellulose specialties volumes decreased by four percent due to the timing of customer orders.
Absorbent materials sales decreased in the quarter as prices declined 17 percent from the prior year period reflecting weaker markets, while volumes decreased 19 percent due to the timing of customer orders.
The Jesup mill cellulose specialties expansion project ("CSE") is on pace to be completed by mid-2013. Upon completion of the CSE, we will be exiting the more commodity-like absorbent materials business and transitioning to producing only cellulose specialties.

Operating Income (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume/ Mix |  | Cost/Other |
Total Operating Income | $ | 76 |  |  | $ | 18 |  |  | $ | (5 | ) |  | $ | (8 | ) |  | $ | 81 |

Operating income improved in first quarter 2012 over the prior year period as higher cellulose specialties prices more than offset a seven percent increase in production costs and lower shipments due to the timing of customer orders.
WOOD PRODUCTS

Sales (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume |
Total Sales | $ | 16 |  |  | $ | (1 | ) |  | $ | 4 |  |  | $ | 19 |

Operating Income (in millions) | 2011 |  | Changes Attributable to: |  | 2012
Three months ended March 31, | Price |  | Volume/Costs |
Total Operating Income | $ | — |  |  | $ | (1 | ) |  | $ | 2 |  |  | $ | 1 |

Wood Products results improved in first quarter 2012 compared to the prior year period as volumes rose 26 percent due to favorable weather conditions. First quarter 2012 also benefited from lower wood costs.
OTHER OPERATIONS
Sales and operating income decreased from the prior year period due to lower Asian demand and foreign exchange losses in first quarter 2012.
Corporate and Other Expense/Eliminations
Corporate and other expenses increased $3 million from the prior year period primarily due to the recognition of stock based compensation expense associated with Lee Thomas' retirement.
Interest Expense, Interest Income and Other
Interest and other were slightly below the prior year period due to higher capitalized interest related to the CSE and lower cost of borrowings in first quarter 2012.
Income Tax Expense
The first quarter effective tax rate was 25.9 percent compared to 21.7 percent in 2011. The higher tax rate was due to
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proportionately higher expected earnings from our taxable REIT subsidiaries in 2012.
Outlook
In Forest Resources, we will continue capitalizing on local market opportunities in our Atlantic and Gulf regions, while in the Northwest we plan to increase harvest volumes as Asian markets improve. In Performance Fibers, we anticipate another record year driven by strong cellulose specialties markets and we are on track to complete our CSE project by mid-2013, as planned. We expect full year earnings to be comparable to 2011, excluding special items, and CAD to range from $285 million to $310 million, substantially above our dividend.
Our full year 2012 financial guidance is subject to a number of variables and uncertainties, including those discussed under Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements of this Form 10-Q and Item 1A — Risk Factors in our 2011 Annual Report on Form 10-K.
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 March 31, |  | As of December 31,
| 2012 |  | 2011
Cash and cash equivalents (a) | $ | 237 |  |  | $ | 79 |
Total debt | 1,024 |  |  | 847 |
Shareholders’ equity | 1,342 |  |  | 1,323 |
Total capitalization (total debt plus equity) | 2,366 |  |  | 2,170 |
Debt to capital ratio | 43 | % |  | 39 | %

(a) Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the three months ended March 31:

| 2012 |  | 2011
Cash provided by (used for): |  |  |
Operating activities | $ | 111 |  |  | $ | 116 |
Investing activities | (74 | ) |  | (31 | )
Financing activities | 120 |  |  | (117 | )

Cash Provided by Operating Activities
Cash provided by operating activities decreased primarily due to a $5.9 million income tax refund received in first quarter 2011.
Cash Used for Investing Activities
Cash used for investing activities rose mainly due to an increase in strategic capital, which included the Jesup mill CSE and timberland acquisitions. Additionally, capital expenditures and restricted cash from the timing of like-kind exchange transactions were higher in 2012.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities increased mainly due to net borrowings of $175 million in first quarter of 2012 versus net repayments of $75 million in first quarter of 2011. This was partially offset by higher dividend payments due to the third quarter 2011 dividend rate increase and payment of debt issuance costs for the $325 million of notes issued in 2012.
Expected 2012 Expenditures
Capital expenditures in 2012 are forecasted to be between $150 million and $155 million, excluding strategic acquisitions and the CSE. We spent $41 million ($26 million net of purchases on account) in the first quarter of 2012 on the CSE and expect
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total expenditures in 2012 to range between $200 million and $210 million. Our 2012 dividend payments are expected to increase from $185 million in 2011 to $197 million assuming no change in the quarterly dividend rate of $0.40 per share. We have a $23 million note payable which matures June 2012 and $300 million in Senior Exchangeable Notes due October 2012. We expect to repay the note payable with cash on hand and refinance the Senior Exchangeable Notes.
We made no discretionary pension contributions in the first quarter of 2012. We have no mandatory pension contributions in 2012 but may make discretionary contributions. Cash payments for income taxes in 2012 are anticipated to be between $55 million and $60 million. Expenditures related to dispositions and discontinued operations were $2 million for the first quarter of 2012; full year 2012 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 March 31,
| 2012 |  | 2011
Net Income to EBITDA Reconciliation |  |  |
Net Income | $ | 53 |  |  | $ | 58 |
Income tax expense | 19 |  |  | 16 |
Interest, net | 12 |  |  | 14 |
Depreciation, depletion and amortization | 31 |  |  | 32 |
EBITDA | $ | 115 |  |  | $ | 120 |

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 March 31,
| 2012 |  | 2011
EBITDA by Segment |  |  |
Forest Resources | $ | 25 |  |  | $ | 26 |
Real Estate | 8 |  |  | 10 |
Performance Fibers | 92 |  |  | 89 |
Wood Products | 2 |  |  | 1 |
Other Operations | (1 | ) |  | 1 |
Corporate and other | (11 | ) |  | (7 | )
EBITDA | $ | 115 |  |  | $ | 120 |

For the three months ended March 31, 2012, EBITDA was lower than the prior year period primarily due to lower operating results.
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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 March 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income (Loss) | $ | 8 |  |  | $ | 6 |  |  | $ | 81 |  |  | $ | 1 |  |  | $ | (1 | ) |  | $ | (11 | ) |  | $ | 84 |
Add: Depreciation, depletion and amortization | 17 |  |  | 2 |  |  | 11 |  |  | 1 |  |  | — |  |  | — |  |  | 31 |
EBITDA | $ | 25 |  |  | $ | 8 |  |  | $ | 92 |  |  | $ | 2 |  |  | $ | (1 | ) |  | $ | (11 | ) |  | $ | 115 |
Three Months Ended March 31, 2011 |  |  |  |  |  |  |  |  |  |  |  |  |
Operating Income | $ | 11 |  |  | $ | 7 |  |  | $ | 76 |  |  | $ | — |  |  | $ | 1 |  |  | $ | (7 | ) |  | $ | 88 |
Add: Depreciation, depletion and amortization | 15 |  |  | 3 |  |  | 13 |  |  | 1 |  |  | — |  |  | — |  |  | 32 |
EBITDA | $ | 26 |  |  | $ | 10 |  |  | $ | 89 |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | (7 | ) |  | $ | 120 |

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."
Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):

| Three Months Ended March 31,
| 2012 |  | 2011
Cash provided by operating activities | $ | 111 |  |  | $ | 116 |
Capital expenditures (a) | (42 | ) |  | (35 | )
Change in committed cash | 5 |  |  | (1 | )
Excess tax benefits on stock-based compensation | 4 |  |  | 4 |
Other | 9 |  |  | 4 |
CAD | 87 |  |  | 88 |
Mandatory debt repayments | — |  |  | — |
Adjusted CAD | $ | 87 |  |  | $ | 88 |

Cash used for investing activities | $ | (74 | ) |  | $ | (31 | )
Cash provided by (used for) financing activities | $ | 120 |  |  | $ | (117 | )

(a) Capital expenditures exclude strategic capital. Strategic capital totaled $41 million for the CSE and $9 million for timberland acquisitions for the three months ended March 31, 2012. Strategic capital totaled $3 million for timberland acquisitions for the period ended March 31, 2011.
Adjusted CAD was consistent from 2011 to 2012 as a tax refund received in first quarter 2011 was offset by a decrease in committed cash. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.
Liquidity Facilities
In March 2012, Rayonier issued $325 million of 3.75% Senior Notes due 2022. Approximately $150 million of the proceeds from these notes were used to repay borrowings outstanding under our revolving credit facility. The Company had $445 million of available borrowings under this facility at March 31, 2012.
As of March 31, 2012, the $172.5 million 4.50% Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending June 30, 2012. Per the indenture, in order for the notes to become exchangeable, the Company's stock price must exceed 130 percent of the exchange price for 20 trading days in a period of 30 consecutive trading days as of the last day of the quarter. If the note holders exercise their option prior to June 30, 2012, the Company intends to repay the notes with cash on hand or by accessing the revolving credit facility.
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In connection with our installment note and credit facility, covenants must be met, including ratios based on the covenant definition of EBITDA and ratios of cash flows to fixed charges. At March 31, 2012, we are in compliance with all of these covenants.
In addition to these financial covenants, the installment note, mortgage note and credit facility include customary covenants that limit the incurrence of debt, the disposition of assets, and the making of certain payments between Rayonier Forest Resources ("RFR") and Rayonier among others. An asset sales covenant in the RFR $112.5 installment note agreement requires us, subject to certain exceptions, to either reinvest cumulative timberland sales proceeds for individual sales greater than $10 million (the "excess proceeds") in timberland-related investments and activities or, once the amount of excess proceeds not reinvested exceeds $50 million, to offer the note holders prepayment of the notes ratably in the amount of the excess proceeds. The amount of excess proceeds was $37.5 million at both March 31, 2012 and December 31, 2011. During April 2012, the excess proceeds exceeded the $50 million limit and as a result, repayment of $59.9 million has been offered to the note holders through May 15, 2012, at which time the excess proceeds will reset to zero.
Contractual Financial Obligations and Off-Balance Sheet Arrangements
For the three months ended March 31, 2012, the only significant changes to the Contractual Financial Obligations table as presented in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2011 Annual Report on Form 10-K, were the issuance of $325 million of 3.75% Senior Notes due 2022 and the repayment of $150 million on our revolving credit facility. As a result of these changes, interest payments on long-term debt are expected to increase by approximately $101 million through the year 2022. See Note 13 — Debt for additional information. See Note 17 — Guarantees for details on the letters of credit, surety bonds and guarantees as of March 31, 2012.
Sales Volumes by Segment:

| Three Months Ended March 31,
| 2012 |  | 2011
Forest Resources — in thousands of short green tons |  |  |
Atlantic | 737 |  |  | 645 |
Gulf States | 442 |  |  | 346 |
Northern | 441 |  |  | 436 |
Total | 1,620 |  |  | 1,427 |
Real Estate — in acres |  |  |
Development | 20 |  |  | 57 |
Rural | 5,452 |  |  | 5,445 |
Non-Strategic Timberlands | 238 |  |  | 330 |
Total | 5,710 |  |  | 5,832 |
Performance Fibers |  |  |
Sales volume — in thousands of metric tons |  |  |
Cellulose specialties | 117 |  |  | 122 |
Absorbent materials | 51 |  |  | 63 |
Total | 168 |  |  | 185 |
Wood Products |  |  |
Lumber sales volume — in millions of board feet | 70 |  |  | 56 |

Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), are designed with the objective of ensuring that information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported within the time
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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 March 31, 2012.
In the quarter ended March 31, 2012, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of Rayonier common stock during the quarter ended March 31, 2012:

Period |  | Total Number of Shares Purchased (1) |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31 | 156,088 |  |  | $ | 45.99 |  |  | — |  |  | 3,765,587 |
February 1 to February 29 | — |  |  | — |  |  | — |  |  | 3,765,587 |
March 1 to March 31 | 13,669 |  |  | $ | 44.19 |  |  | — |  |  | 3,765,587 |
| Total | 169,757 |  |  |  |  | — |  |  | 3,765,587 |

(1) | Repurchased to satisfy the minimum tax withholding requirements related to the vesting of performance and restricted shares under the Rayonier Incentive Stock Plan.

See Item 5 - Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in our 2011 Annual Report on Form 10-K for additional information regarding our Common Share repurchase program.
Item 6. Exhibits

1.1 | Underwriting Agreement, dated February 29, 2012, among Rayonier Inc., the subsidiary guarantors named therein and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the several underwriters named therein, relating to the 3.750% Senior Notes due 2022 | Incorporated by reference to Exhibit 1.1 to the Registrant's March 1, 2012 Form 8-K
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
4.1 | Indenture, dated March 5, 2012, between Rayonier Inc., as issuer, and The Bank of New York Mellon Trust Company, N.A., as trustee | Incorporated by reference to Exhibit 4.1 to the Registrant's March 5, 2012 Form 8-K
4.2 | First Supplemental Indenture relating to the 3.750% Senior Notes due 2022, dated March 5, 2012, among Rayonier Inc., as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee | Incorporated by reference to Exhibit 4.2 to the Registrant's March 5, 2012 Form 8-K
4.3 | Form of Note for 3.750% Senior Notes due 2022 (contained in Exhibit A to Exhibit 4.2) | Incorporated by reference to Exhibit 4.2 to the Registrant's March 5, 2012 Form 8-K
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 March 31, 2012, formatted in Extensible Business Reporting Language ("XBRL"), includes: (i) the Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2012 and 2011; (ii) the Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (iii) the Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011; 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 the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | RAYONIER INC.
|  | (Registrant)
| By: | /S/ HANS E. VANDEN NOORT
|  | Hans E. Vanden Noort Senior Vice President and Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

Date: April 25, 2012
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