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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, 2018
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
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12232697&doc=12
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
1 RAYONIER WAY
YULEE, FL 32097
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
  
 
Non-accelerated filer  o
  
Smaller reporting company o
  
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 27, 2018, there were outstanding 129,392,968 Common Shares of the registrant.









Table of Contents

TABLE OF CONTENTS
 
Item
 
 
Page
 
 
PART I - FINANCIAL INFORMATION
 
1.
 
 
 
 
 
 
 
 
 
 
 
2.
 
3.
 
4.
 
 
 
PART II - OTHER INFORMATION
 
1.
 
2.
 
6.
 
 
 
 

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Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2018
 
2017
SALES

$203,196

 

$194,491

Costs and Expenses
 
 
 
Cost of sales
138,488

 
136,828

Selling and general expenses
9,003

 
9,590

Other operating income, net (Note 15)
(1,369
)
 
(1,188
)

146,122

 
145,230

OPERATING INCOME
57,074

 
49,261

Interest expense
(8,052
)
 
(8,415
)
Interest and other miscellaneous income, net
620

 
518

INCOME BEFORE INCOME TAXES
49,642

 
41,364

Income tax expense (Note 8)
(6,936
)
 
(6,281
)
NET INCOME
42,706

 
35,083

Less: Net income attributable to noncontrolling interest
2,167

 
1,240

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
40,539

 
33,843

OTHER COMPREHENSIVE INCOME
 
 
 
Foreign currency translation adjustment, net of income tax expense of $0 and $0
9,688

 
2,432

Cash flow hedges, net of income tax benefit (expense) of $368 and ($32)
16,615

 
2,553

Amortization of pension and postretirement plans, net of income tax expense of $0 and $0
159

 
116

Total other comprehensive income
26,462

 
5,101

COMPREHENSIVE INCOME
69,168

 
40,184

Less: Comprehensive income attributable to noncontrolling interest
4,483

 
1,651

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.

$64,685

 

$38,533

EARNINGS PER COMMON SHARE (Note 11)
 
 
 
Basic earnings per share attributable to Rayonier Inc.

$0.31

 

$0.27

Diluted earnings per share attributable to Rayonier Inc.

$0.31

 

$0.27

 
 
 
 
Dividends declared per share

$0.25

 

$0.25


See Notes to Consolidated Financial Statements.

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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
March 31, 2018
 
December 31, 2017
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents

$92,785

 

$112,653

Accounts receivable, less allowance for doubtful accounts of $23 and $23
37,793

 
27,693

Inventory (Note 16)
19,993

 
24,141

Prepaid expenses
16,436

 
15,993

Assets held for sale (Note 18)
24,552

 

Other current assets
4,935

 
3,047

Total current assets
196,494

 
183,527

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,424,675

 
2,462,066

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT
     INVESTMENTS (NOTE 6)
87,702

 
80,797

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
3,962

 
3,962

Buildings
24,236

 
23,618

Machinery and equipment
4,416

 
4,440

Construction in progress
237

 
627

Total property, plant and equipment, gross
32,851

 
32,647

Less — accumulated depreciation
(9,675
)
 
(9,269
)
Total property, plant and equipment, net
23,176

 
23,378

RESTRICTED CASH (NOTE 17)
84,903

 
59,703

OTHER ASSETS
61,422

 
49,010

TOTAL ASSETS

$2,878,372

 

$2,858,481

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$27,082

 

$25,148

Current maturities of long-term debt (Note 5)

 
3,375

Accrued taxes
3,583

 
3,781

Accrued payroll and benefits
3,760

 
9,662

Accrued interest
8,100

 
5,054

Deferred revenue
7,901

 
9,721

Other current liabilities
15,091

 
11,807

Total current liabilities
65,517

 
68,548

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS (NOTE 5)
996,145

 
1,022,004

PENSION AND OTHER POSTRETIREMENT BENEFITS (NOTE 14)
31,137

 
31,905

OTHER NON-CURRENT LIABILITIES
49,400

 
43,084

COMMITMENTS AND CONTINGENCIES (NOTES 7 and 9)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 129,174,301 and 128,970,776 shares issued and outstanding
878,927

 
872,228

Retained earnings
715,283

 
707,378

Accumulated other comprehensive income (Note 19)
37,563

 
13,417

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,631,773

 
1,593,023

Noncontrolling interest
104,400

 
99,917

TOTAL SHAREHOLDERS’ EQUITY
1,736,173

 
1,692,940

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,878,372

 

$2,858,481


See Notes to Consolidated Financial Statements.

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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except share data)


 
Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Non-controlling Interest
 
Shareholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2016
122,904,368

 

$709,867

 

$700,887

 

$856

 

$85,142

 

$1,496,752

Cumulative-effect adjustment due to adoption of ASU No. 2016-16

 

 
(14,365
)
 

 

 
(14,365
)
Net income

 

 
148,842

 

 
12,737

 
161,579

Dividends ($1.00 per share)

 

 
(127,986
)
 

 

 
(127,986
)
Issuance of shares under incentive stock plans
322,314

 
4,751

 

 

 

 
4,751

Stock-based compensation

 
5,396

 

 

 

 
5,396

Repurchase of common shares
(5,906
)
 
(176
)
 

 

 

 
(176
)
Actuarial change and amortization of pension and postretirement plan liabilities

 

 

 
(208
)
 

 
(208
)
Foreign currency translation adjustment

 

 

 
7,416

 
1,698

 
9,114

Cash flow hedges

 

 

 
5,353

 
340

 
5,693

Issuance of shares under equity offering, net of costs
5,750,000

 
152,390

 

 

 

 
152,390

Balance, December 31, 2017
128,970,776

 

$872,228

 

$707,378

 

$13,417

 

$99,917

 

$1,692,940

Net income

 

 
40,539

 

 
2,167

 
42,706

Dividends ($0.25 per share)

 

 
(32,634
)
 

 

 
(32,634
)
Issuance of shares under incentive stock plans
204,336

 
5,455

 

 

 

 
5,455

Stock-based compensation

 
1,262

 

 

 

 
1,262

Repurchase of common shares
(811
)
 
(18
)
 

 

 

 
(18
)
Amortization of pension and postretirement plan liabilities

 

 

 
159

 

 
159

Foreign currency translation adjustment

 

 

 
7,606

 
2,082

 
9,688

Cash flow hedges

 

 

 
16,381

 
234

 
16,615

Balance, March 31, 2018
129,174,301

 

$878,927

 

$715,283

 

$37,563

 

$104,400

 

$1,736,173


See Notes to Consolidated Financial Statements.















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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
Net income

$42,706

 

$35,083

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
34,537

 
30,773

Non-cash cost of land and improved development
1,624

 
4,479

Stock-based incentive compensation expense
1,262

 
880

Deferred income taxes
6,982

 
5,989

Amortization of losses from pension and postretirement plans
159

 
116

Gain on sale of large disposition of timberlands

 
(28,188
)
Other
6,271

 
2,306

Changes in operating assets and liabilities:
 
 
 
Receivables
(10,473
)
 
(11,442
)
Inventories
(1,268
)
 
(3,481
)
Accounts payable
3,921

 
5,886

Income tax receivable/payable
(290
)
 
(126
)
All other operating activities
(7,196
)
 
(8,332
)
CASH PROVIDED BY OPERATING ACTIVITIES
78,235

 
33,943

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(13,192
)
 
(14,362
)
Real estate development investments
(2,340
)
 
(2,185
)
Purchase of timberlands
(12
)
 
(11,293
)
Net proceeds from large disposition of timberlands

 
42,034

Rayonier office building under construction

 
(2,604
)
Other
(2,105
)
 
(5,617
)
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES
(17,649
)
 
5,973

FINANCING ACTIVITIES
 
 
 
Issuance of debt

 
29,719

Repayment of debt
(29,375
)
 
(20,530
)
Dividends paid
(32,123
)
 
(30,618
)
Proceeds from the issuance of common shares under incentive stock plan
5,455

 
2,251

Proceeds from the issuance of common shares from equity offering, net of costs

 
152,345

Repurchase of common shares
(18
)
 

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(56,061
)
 
133,167

EFFECT OF EXCHANGE RATE CHANGES ON CASH
807

 
(67
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH (a)
 
 
 
Change in cash, cash equivalents and restricted cash
5,332

 
173,016

Balance, beginning of year
172,356

 
157,617

Balance, end of period

$177,688

 

$330,633

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period:
 
 
 
Interest (b)

$2,585

 

$3,695

Income taxes
281

 
214

Non-cash investing activity:
 
 
 
Capital assets purchased on account
1,525

 
5,430

 
 
 
 
 
(a)
Due to the adoption of ASU No. 2016-18, restricted cash is now included with cash and cash equivalents when reconciling the beginning-of-year and end-of-period total amounts shown and therefore changes in restricted cash are no longer reported as investing activities. Prior period amounts have been restated to conform to current period presentation. For additional information and a reconciliation of cash, see Note 17 — Restricted Cash.
(b)
Interest paid is presented net of patronage payments received of $3.7 million and $3.0 million for the three months ended March 31, 2018 and March 31, 2017, respectively. For additional information on patronage payments, see Note 5 — Debt in the 2017 Form 10-K.

See Notes to Consolidated Financial Statements.

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


1.
BASIS OF PRESENTATION
The unaudited 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 (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The year-end balance sheet information was derived from audited financial statements not included herein. In the opinion of management, these financial statements and notes reflect any adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC (the “2017 Form 10-K”).
SUMMARY OF UPDATES TO SIGNIFICANT ACCOUNTING POLICIES
REVENUE
See Note 2 — Revenue for significant accounting policies related to revenue that were revised upon adoption of Accounting Standards Codification (“ASC”) 606.
COST OF SALES
Cost of sales associated with real estate sold includes the cost of the land, the cost of any timber on the property that was conveyed to the buyer, any real estate development costs and any closing costs including sales commissions that may be borne by the Company. As allowed under GAAP, the Company expenses closing costs, including sales commissions, when incurred for all real estate sales with future performance obligations expected to be satisfied within one year. When developed residential or commercial land is sold, the cost of sales includes actual costs incurred and estimates of future development costs benefiting the property sold through completion. Costs are allocated to each sold unit or lot based upon the relative sales value. For purposes of allocating development costs, estimates of future revenues and development costs are re-evaluated periodically throughout the year, with adjustments being allocated prospectively to the remaining units available for sale.
For a full description of our significant accounting policies, see Note 2 — Summary of Significant Accounting Policies in the 2017 Form 10-K.
RECENTLY ADOPTED STANDARDS
The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), on January 1, 2018. The Company elected to use the modified retrospective method to contracts that were not completed at the date of adoption. The Company also elected not to retrospectively restate contracts modified prior to January 1, 2018. A cumulative effect of adoption adjustment to the opening balance of retained earnings was not recorded as there was no accounting impact to any contracts with customers not completed at the date of adoption. See Note 2 — Revenue for additional information.
In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component of net periodic benefit cost in the Consolidated Statements of Income in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net periodic benefit cost (interest cost, expected return on plan assets and amortization of losses or gains) are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. ASU No. 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, and is required to be applied retrospectively to all periods presented beginning in the period of adoption. Rayonier adopted ASU No. 2017-07 during the first quarter ended March 31, 2018 and applied the update retrospectively to all periods presented. See Note 14 — Employee Benefit Plans for the components of net periodic benefit cost and the location of these items in the Consolidated Statements of Income and Comprehensive Income.

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

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statements of Cash Flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU No. 2016-18 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Rayonier adopted ASU No. 2016-18 in the first quarter ended March 31, 2018 and applied the update retrospectively to all periods presented. Restricted cash is now included with cash and cash equivalents when reconciling the beginning-of-year and end-of-period total amounts shown on the Consolidated Statements of Cash Flows and therefore changes in restricted cash are no longer reported as cash flow activities. See Note 17 — Restricted Cash for additional information, including the nature of restrictions on the Company’s cash, cash equivalents, and restricted cash.

Rayonier adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments in the first quarter ended March 31, 2018 with no material impact on the consolidated financial statements.
NEW ACCOUNTING STANDARDS
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which currently requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. ASU No. 2016-02 also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. In January 2018, the FASB issued Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. This update provides an optional transition practical expedient not to evaluate under ASU No. 2016-02 existing or expired land easements that were not previously accounted for as leases under the current leases guidance. An entity that elects this practical expedient should evaluate new or modified land easements under ASU No. 2016-02, once adopted. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of ASU No. 2016-02 to assess whether they meet the definition of a lease. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and is required to be applied on a modified retrospective basis beginning at the earliest period presented. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which will make more financial and non-financial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU No. 2017-12 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted and the amended presentation and disclosure guidance is required to be applied on a prospective basis. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this update also require certain disclosures about stranded tax effects. ASU No. 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. ASU No. 2018-02 is required to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Early adoption is permitted in any interim period for which financial statements have not yet been issued. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

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

In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments —Overall (Subtopic 825-10), to clarify certain provisions of ASU No. 2016-01 and amend other provisions. ASU No. 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted for entities that have adopted ASU 2016-01. The Company early adopted ASU 2016-01 during the fourth quarter ended December 31, 2017 and is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
SUBSEQUENT EVENTS
The Company has evaluated events occurring from March 31, 2018 to the date of issuance of these Consolidated Financial Statements for potential recognition or disclosure in the consolidated financial statements. No events were identified that warranted recognition. See Note 9 — Contingencies for events that warranted disclosure.    
2.    REVENUE
ADOPTION OF ASC 606
For information on the adoption of ASC 606, including changes to significant accounting policies and required transition disclosures, see Note 1 — Basis of Presentation.
REVENUE RECOGNITION
The Company recognizes revenues when control of promised goods or services (“performance obligations”) is transferred to customers, in an amount that reflects the consideration expected to be entitled to in exchange for those goods or services (“transaction price”). The Company generally satisfies performance obligations within a year of entering into a contract and therefore has applied the disclosure exemption found under ASC 606-10-50-14. Unsatisfied performance obligations as of March 31, 2018 are primarily due to advances on stumpage contracts and unearned license revenue. These performance obligations are expected to be satisfied within the next twelve months. The Company generally collects payment within a year of satisfying performance obligations and therefore has elected not to adjust revenues for a financing component.
    

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

The following table presents our revenue from contracts with customers disaggregated by product type for the three months ended March 31, 2018 and 2017:
Three Months Ended
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Elim.
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Pulpwood

$21,606

 

$3,419

 

$5,844

 

 

$4,257

 

 

$35,126

Sawtimber
15,937

 
27,068

 
44,745

 

 
34,826

 

 
122,576

Hardwood
597

 

 

 

 

 

 
597

Total Timber Sales
38,140

 
30,487

 
50,589

 

 
39,083

 

 
158,299

License Revenue, Primarily From Hunting
4,084

 
25

 
52

 

 

 

 
4,161

Other Non-Timber/Carbon Revenue
1,195

 
805

 
2,323

 

 

 

 
4,323

Agency Fee Income

 

 

 

 
123

 

 
123

Total Non-Timber Sales
5,279

 
830

 
2,375

 

 
123

 

 
8,607

Improved Development



 

 
1,121

 

 

 
1,121

Unimproved Development



 

 
7,446

 

 

 
7,446

Rural



 

 
1,652

 

 

 
1,652

Non-strategic / Timberlands



 

 
25,845

 

 

 
25,845

Large Dispositions



 

 

 

 

 

Total Real Estate Sales



 

 
36,064

 

 

 
36,064

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue from Contracts with Customers
43,419

 
31,317

 
52,964

 
36,064

 
39,206

 

 
202,970

Other Non-Timber Sales, Primarily Lease
169

 
57

 
 

 

 

 
226

Intersegment

 

 

 

 
6

 
(6
)
 

Total Revenue

$43,588

 

$31,374

 

$52,964

 

$36,064

 

$39,212

 

($6
)
 

$203,196

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Pulpwood

$18,976

 

$3,359

 

$5,161

 

 

$2,837

 

 

$30,333

Sawtimber
13,023

 
21,433

 
35,579

 

 
31,140

 

 
101,175

Hardwood
716

 

 

 

 

 

 
716

Total Timber Sales
32,715

 
24,792

 
40,740

 

 
33,977

 

 
132,224

License Revenue, Primarily from Hunting
3,830

 
97

 
46

 

 

 

 
3,973

Other Non-Timber Revenue
2,390

 
946

 
88

 

 

 

 
3,424

Agency Fee Income

 

 

 

 
288

 

 
288

Total Non-Timber Sales
6,220

 
1,043

 
134

 

 
288

 

 
7,685

Improved Development

 

 

 

 

 

 

Unimproved Development

 

 

 

 

 

 

Rural

 

 

 
6,739

 

 

 
6,739

Non-strategic / Timberlands

 

 

 
5,599

 

 

 
5,599

Large Dispositions

 

 

 
41,951

 

 

 
41,951

Total Real Estate Sales

 

 

 
54,289

 

 

 

$54,289

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue from Contracts with Customers
38,935

 
25,835

 
40,874

 
54,289

 
34,265

 

 
194,198

Other Non-Timber Sales, Primarily Lease
203

 
90

 

 

 

 

 
293

Total Revenue

$39,138



$25,925



$40,874



$54,289



$34,265



 

$194,491


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

REVENUE RECOGNITION FOR TIMBER SALES AND NON-TIMBER INCOME
Revenue from the sale of timber is recognized when control passes to the buyer. The Company utilizes two primary methods or sales channels for the sale of timber, a stumpage or standing timber model and a delivered log model. The sales method the Company employs depends upon local market conditions and which method management believes will provide the best overall margins. Under the stumpage model, standing timber is sold primarily under pay-as-cut contracts, with specified duration (typically one year or less) and fixed prices, whereby revenue is recognized as timber is severed and the sales volume is determined. The Company also sells stumpage under lump-sum contracts for specified parcels where the Company receives cash for the full agreed value of the timber prior to harvest and control passes to the buyer upon signing the contract. The Company retains interest in the land, slash products, and the use of the land for recreational and other purposes. Any uncut timber remaining at the end of the contract period reverts to the Company. Revenue is recognized for lump-sum timber sales when payment is received, the contract is signed and control passes to the buyer. A third type of stumpage sale the Company utilizes is an agreed-volume sale, whereby revenue is recognized using the output method, as periodic physical observations are made of the percentage of acreage harvested.
Under the delivered log model, the Company hires third-party loggers and haulers to harvest timber and deliver it to a buyer. Sales of domestic logs generally do not require an initial payment and are made to third-party customers on open credit terms. Sales of export logs generally require a letter of credit from an approved bank. Revenue is recognized when the logs are delivered and control has passed to the buyer. For domestic log sales, control is considered passed to the buyer as the logs are delivered to the customer’s facility. For export log sales (primarily in New Zealand), control is considered passed to the buyer upon delivery onto the export vessel.
Non-timber income is primarily comprised of hunting and recreational licenses. Such income and any related cost are recognized ratably over the term of the agreement and included in “Sales” and “Cost of sales”, respectively. Payment is generally due upon contract execution.
The following table summarizes revenue recognition and general payment terms for timber sales:
Contract Type
 
Performance
Obligation
 
Timing of
Revenue Recognition
 
General
Payment Terms
Stumpage Pay-as-Cut
 
Right to harvest a unit (i.e. ton, MBF, JAS m3) of standing timber
 
As timber is severed
(point-in-time)
 
Initial payment between
5% and 20% of estimated contract value; collection generally within 10 days of severance
Stumpage Lump Sum
 
Right to harvest an agreed upon volume of standing timber
 
Contract execution
(point-in-time)
 
Full payment due upon contract execution
Stumpage Agreed Volume
 
Right to harvest an agreed upon acreage of standing timber
 
As timber is severed (over-time)
 
Payments made throughout contract term at the earlier of a specified harvest percentage or time elapsed
Delivered Wood (Domestic)
 
Delivery of a unit (i.e. ton, MBF, JAS m3) of timber to customer’s facility
 
Upon delivery to customer’s facility
 (point-in-time)
 
No initial payment and on open credit terms; collection generally within 30 days of invoice
Delivered Wood (Export)
 
Delivery of a unit (i.e. ton, MBF, JAS m3) onto export vessel
 
Upon delivery onto export vessel
 (point-in-time)
 
Letter of credit from an approved bank; collection generally within 30 days of delivery

    

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

The following table presents our timber sales disaggregated by contract type for the three months ended March 31, 2018 and 2017:
Three Months Ended
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Trading
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
Stumpage Pay-as-Cut

$22,511

 

 

 

 

$22,511

Stumpage Lump Sum
1,818

 
5,106

 

 

 
6,924

Stumpage Agreed Volume

 

 

 

 

Total Stumpage
24,329

 
5,106

 

 

 
29,435

 
 
 
 
 
 
 
 
 
 
Delivered Wood (Domestic)
13,377

 
25,381

 
20,103

 
937

 
59,798

Delivered Wood (Export)
434

 

 
30,486

 
38,146

 
69,066

Total Delivered
13,811

 
25,381

 
50,589

 
39,083

 
128,864

 
 
 
 
 
 
 
 
 
 
Total Timber Sales

$38,140

 

$30,487

 

$50,589

 

$39,083

 

$158,299

 
 
 
 
 
 
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
Stumpage Pay-as-Cut

$20,102

 

 

 

 

$20,102

Stumpage Lump Sum
2,797

 
2,580

 

 

 
5,377

Stumpage Agreed Volume

 
1,180

 

 

 
1,180

Total Stumpage
22,899

 
3,760

 

 

 
26,659

 
 
 
 
 
 
 
 
 
 
Delivered Wood (Domestic)
9,816

 
21,032

 
18,845

 
1,007

 
50,700

Delivered Wood (Export)

 

 
21,895

 
32,970

 
54,865

Total Delivered
9,816

 
21,032

 
40,740

 
33,977

 
105,565

 
 
 
 
 
 
 
 
 
 
Total Timber Sales

$32,715

 

$24,792

 

$40,740

 

$33,977

 

$132,224


REVENUE RECOGNITION FOR REAL ESTATE SALES
The Company recognizes revenue on sales of real estate generally at the point in time when cash has been received, the sale has closed, and control has passed to the buyer. A deposit of 5% is generally required at the time a purchase and sale agreement is executed, with the balance due at closing. On sales of real estate containing future performance obligations, revenue is recognized using the input method based on costs incurred to date relative to the total costs expected to fulfill the performance obligations in the contract with the customer.
REVENUE RECOGNITION FOR LOG TRADING
Log trading revenue is generally recognized when procured logs are delivered to the buyer and control has passed. For domestic log trading, control is considered passed to the buyer as the logs are delivered to the customer’s facility. For export log trading control is considered passed to the buyer upon delivery onto the export vessel. The Trading segment also includes sales from log agency contracts, whereby the Company acts as an agent managing export services on behalf of third parties. Revenue for log agency fees are recognized net of related costs.
Contract Balances
The timing of revenue recognition, invoicing and cash collections results in accounts receivable and deferred revenue (contract liabilities) on the Consolidated Balance Sheets. Accounts receivable are recorded when the Company has an unconditional right to consideration for completed performance under the contract. Contract liabilities relate to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as (or when) the Company performs under the contract.
Revenue recognized for the three months ended March 31, 2018, and March 31, 2017, that was included in the contract liability balance at the beginning of each year was $6.4 million and $4.8 million, respectively. This revenue was primarily from hunting licenses and the use of advances on pay-as-cut timber sales.

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

3.
JOINT VENTURE INVESTMENT
MATARIKI FORESTRY GROUP
The Company maintains a controlling financial interest in Matariki Forestry Group (the “New Zealand JV”), a joint venture that owns or leases approximately 410,000 legal acres of New Zealand timberland. Accordingly, the Company consolidates the New Zealand JV’s balance sheet and results of operations. The portions of the consolidated financial position and results of operations attributable to the New Zealand JV’s 23% noncontrolling interest are shown separately within the Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Changes in Shareholders’ Equity. Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the New Zealand JV.

4.
SEGMENT AND GEOGRAPHICAL INFORMATION
Sales between operating segments are made based on estimated fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on segment operating income and Adjusted EBITDA. Sales between operating segments are made based on estimated fair market value, and intercompany sales, purchases and profits (losses) are eliminated in consolidation. Asset information is not reported by segment, as the Company does not produce asset information by segment internally.
Operating income as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income. Certain income (loss) items in the Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest expense, interest and other miscellaneous income and income tax expense, are not considered by management to be part of segment operations and are included under “Corporate and other” or “unallocated interest expense and other.”
The following tables summarize the segment information for the three months ended March 31, 2018 and 2017:
 
Three Months Ended March 31,
SALES
2018
 
2017
Southern Timber

$43,588

 

$39,138

Pacific Northwest Timber
31,374

 
25,925

New Zealand Timber
52,964

 
40,874

Real Estate (a)
36,064

 
54,289

Trading
39,212

 
34,265

Intersegment Eliminations
(6
)
 

Total

$203,196

 

$194,491

 
 
 
 
 
(a)
The three months ended March 31, 2017 includes $42.0 million of Large Dispositions.

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

 
Three Months Ended March 31,
OPERATING INCOME (LOSS)
2018
 
2017
Southern Timber

$12,227

 

$13,939

Pacific Northwest Timber
4,674

 
(878
)
New Zealand Timber
15,957

 
10,243

Real Estate (a)
28,054

 
29,665

Trading
149

 
1,097

Corporate and other
(3,987
)
 
(4,805
)
Total Operating Income
57,074

 
49,261

Unallocated interest expense and other
(7,432
)
 
(7,897
)
Total Income before Income Taxes

$49,642

 

$41,364

 
 
 
 
 
(a)
The three months ended March 31, 2017 includes $28.2 million of Large Dispositions.
 
Three Months Ended March 31,
DEPRECIATION, DEPLETION AND AMORTIZATION
2018
 
2017
Southern Timber

$15,979

 

$12,452

Pacific Northwest Timber
9,504

 
10,210

New Zealand Timber
5,717

 
5,407

Real Estate (a)
3,066

 
10,707

Trading

 

Corporate and other
271

 
100

Total

$34,537

 

$38,876

 
 
 
 
 
(a)
The three months ended March 31, 2017 includes $8.1 million from Large Dispositions.    
 
Three Months Ended March 31,
NON-CASH COST OF LAND AND IMPROVED DEVELOPMENT
2018
 
2017
Southern Timber

 

Pacific Northwest Timber

 

New Zealand Timber

 

Real Estate (a)
1,624

 
10,222

Trading

 

Total

$1,624

 

$10,222

 
 
 
 
 
(a)
The three months ended March 31, 2017 includes $5.7 million from Large Dispositions.

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

5.
DEBT
Rayonier’s debt consisted of the following at March 31, 2018:
 
March 31, 2018
Term Credit Agreement borrowings due 2024 at a variable interest rate of 3.3% at March 31, 2018 (a)

$350,000

Senior Notes due 2022 at a fixed interest rate of 3.75%
325,000

Incremental Term Loan Agreement borrowings due 2026 at a variable interest rate of 3.6% at March 31, 2018 (b)
300,000

Revolving Credit Facility borrowings due 2020 at an average variable interest rate of 3.1% at March 31, 2018
24,000

Total debt
999,000

Less: Deferred financing costs
(2,855
)
Long-term debt, net of deferred financing costs

$996,145

 
 
 
 
 
(a)    As of March 31, 2018, the periodic interest rate on the term loan facility was LIBOR plus 1.625%. The Company estimates the effective
fixed interest rate on the term loan facility to be approximately 3.3% after consideration of interest rate swaps and estimated patronage
refunds.
(b)    As of March 31, 2018, the periodic interest rate on the incremental term loan was LIBOR plus 1.900%. The Company estimates the
effective fixed interest rate on the incremental term loan facility to be approximately 2.8% after consideration of interest rate swaps and
estimated patronage refunds.
Principal payments due during the next five years and thereafter are as follows:
2018

2019

2020
24,000

2021

2022
325,000

Thereafter
650,000

Total Debt

$999,000

2018 DEBT ACTIVITY
During the three months ended March 31, 2018, the Company made a repayment of $26.0 million on the Revolving Credit Facility. As of March 31, 2018, the Company had available borrowings of $165.6 million under the Revolving Credit Facility, net of $10.4 million to secure its outstanding letters of credit.
In addition, the New Zealand JV fully repaid its shareholder loan held by the noncontrolling interest party during the three months ended March 31, 2018.
DEBT COVENANTS
In connection with the Company’s $350 million term credit agreement (the “Term Credit Agreement”), $300 million incremental term loan agreement (the “Incremental Term Loan Agreement”) and $200 million revolving credit facility (the “Revolving Credit Facility”), customary covenants must be met, the most significant of which include interest coverage and leverage ratios.
In addition to these financial covenants listed above, the Senior Notes, Term Credit Agreement, Incremental Term Loan Agreement and Revolving Credit Facility include customary covenants that limit the incurrence of debt and the disposition of assets, among others. At March 31, 2018, the Company was in compliance with all applicable covenants.

6.
HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT INVESTMENTS
Rayonier continuously assesses potential alternative uses of its timberlands, as some properties may become more valuable for development, residential, recreation or other purposes. The Company periodically transfers, via a sale or contribution from the real estate investment trust (“REIT”) entities to taxable REIT subsidiaries (“TRS”), higher and better use (“HBU”) timberlands to enable land-use entitlement, development or marketing activities. The Company also acquires HBU properties in connection with timberland acquisitions. These properties are managed as timberlands until sold or developed. While the majority of HBU sales involve rural and recreational land, the Company also selectively pursues various land-use entitlements on certain properties for residential, commercial and industrial development in order to enhance the long-term value of such properties. For selected development properties, Rayonier also invests in targeted infrastructure improvements, such as roadways and utilities, to accelerate the marketability and improve the value of such properties.

An analysis of higher and better use timberlands and real estate development investments from December 31, 2017 to March 31, 2018 is shown below:
 
Higher and Better Use Timberlands and Real Estate Development Investments
 
Land and Timber
 
Development Investments
 
Total
Non-current portion at December 31, 2017

$59,653

 

$21,144

 

$80,797

Plus: Current portion (a)
6,702

 
11,648

 
18,350

Total Balance at December 31, 2017
66,355

 
32,792

 
99,147

Non-cash cost of land and improved development
(486
)
 
(999
)
 
(1,485
)
Timber depletion from harvesting activities and basis of timber sold in real estate sales
(258
)
 

 
(258
)
Capitalized real estate development investments (b)

 
2,340

 
2,340

Intersegment transfers
773

 

 
773

Total Balance at March 31, 2018
66,384

 
34,133

 
100,517

Less: Current portion (a)
(3,828
)
 
(8,987
)
 
(12,815
)
Non-current portion at March 31, 2018

$62,556

 

$25,146

 

$87,702

 
 
 
 
 
(a)
The current portion of Higher and Better Use Timberlands and Real Estate Development Investments is recorded in Inventory. See Note 16 — Inventory for additional information.
(b)
Capitalized real estate development investments include $0.2 million of capitalized interest.


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

7.    COMMITMENTS
The Company leases certain buildings, machinery, and equipment under various operating leases. The Company also has long-term lease agreements on certain timberlands in the Southern U.S. and New Zealand. U.S. leases typically have initial terms of approximately 30 to 65 years, with renewal provisions in some cases. New Zealand timberland lease terms range between 30 and 99 years. Such leases are generally non-cancellable and require minimum annual rental payments.
At March 31, 2018, the future minimum payments under non-cancellable operating leases, timberland leases and other commitments were as follows:
 
Operating
Leases
 
Timberland
Leases (a)
 
Commitments (b)
 
Total
Remaining 2018

$878

 

$7,415

 

$6,996

 

$15,289

2019
947

 
9,389

 
4,279

 
14,615

2020
755

 
9,124

 
3,982

 
13,861

2021
636

 
8,947

 
1,877

 
11,460

2022
629

 
8,894

 
1,539

 
11,062

Thereafter (c)
703

 
157,168

 
1,507

 
159,378

 

$4,548

 

$200,937

 

$20,180

 

$225,665

 
 
 
 
 
(a)
The majority of timberland leases are subject to increases or decreases based on either the Consumer Price Index, Producer Price Index or market rates.
(b)
Commitments include $2.4 million of pension contribution requirements remaining in 2018 based on actuarially determined estimates and IRS minimum funding requirements, payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps), construction of the Company’s Wildlight development project and other purchase obligations. For additional information on the pension contribution see Note 15 — Employee Benefit Plans in the 2017 Form 10-K.
(c)
Includes 20 years of future minimum payments for perpetual Crown Forest Licenses (“CFL”). A CFL consists of a license to use public or government owned land to operate a commercial forest. The CFL's extend indefinitely and may only be terminated upon a 35-year termination notice from the government. If no termination notice is given, the CFLs renew automatically each year for a one-year term. As of March 31, 2018, the New Zealand JV has three CFL’s under termination notice that are currently being relinquished as harvest activities are concluding, as well as two fixed term CFL’s expiring in 2062. The annual license fee is determined based on current market rental value, with triennial rent reviews.

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

8.    INCOME TAXES
The operations conducted by the Company’s REIT entities are generally not subject to U.S. federal and state income tax. The New Zealand JV is subject to corporate level tax in New Zealand. Non-REIT qualifying operations are conducted by the Company’s TRS. The primary businesses performed in Rayonier’s TRS include log trading and certain real estate activities, such as the sale and entitlement of development HBU properties. For the three months ended March 31, 2018, the Company recorded income tax expense of $6.9 million. For the three months ended March 31, 2017, the Company recorded income tax expense of $6.3 million.
PROVISION FOR INCOME TAXES
The Company’s effective tax rate is below the 21.0% U.S. statutory rate due to tax benefits associated with being a REIT. The Company’s annualized effective tax rate (“AETR”) as of March 31, 2018 and March 31, 2017 was 13.9% and 15.6%, respectively. The increase in income tax expense and the decrease in AETR for the three months ended March 31, 2018 is principally related to the New Zealand JV.
In accordance with GAAP, the Company recognizes the impact of a tax position if a position is “more-likely-than-not” to prevail. For the three months ended March 31, 2018, there were no material changes in uncertain tax positions.
U.S. TAX REFORM
The Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017 making significant changes to the Internal Revenue Code. Changes include a permanent reduction in the U.S. statutory corporate income tax rate from 35% to 21% beginning January 1, 2018 and a one-time transition tax on the deemed repatriation of deferred foreign earnings in 2017.
The SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides additional clarification regarding the application of ASC Topic 740 when registrants do not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act for the reporting period in which the Act was enacted. SAB 118 provides a measurement period beginning in the reporting period that includes the Act’s enactment date and ending when the registrant has obtained, prepared, and analyzed the information needed in order to complete the accounting requirements, but in no circumstances should the measurement period extend beyond one year from the enactment date.
The Company has not completed its assessment of the accounting implications of the Act. However, the Company reasonably calculated an estimate of the impact of the Act in the 2017 year end income tax provision and recorded $0.1 million of additional income tax expense as of December 31, 2017. This amount was offset by the Alternative Minimum Tax credit benefit, resulting in a zero net effect to income tax expense. This provisional amount is related to the one-time transition tax on the deemed repatriation of deferred foreign earnings as of December 31, 2017. The remeasurement of certain deferred tax assets and liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate resulted in a provisional amount of zero as the change in rate was offset by a change in the valuation allowance.
As the Company completes its analysis of the Act, it may make adjustments to the provisional amounts. No adjustments have been made to the provisional amounts as of the three months ended March 31, 2018. However, any subsequent adjustments to these amounts will be recorded to current tax expense in the quarter the analysis is complete.
The Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries effective January 1, 2018. For the current year, the Company’s REIT entity has a GILTI income inclusion of $0.8 million. The FASB Staff Q&A, Topic 740 No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Due to the Company’s REIT status and the corresponding distribution requirement, the Company has neither a deferred tax related to GILTI nor any current tax expense.


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

9.
CONTINGENCIES

Following the Company’s November 10, 2014 earnings release and filing of the restated interim financial statements for the quarterly periods ended March 31 and June 30, 2014, (the “November 2014 Announcement”), on November 26, 2014, December 29, 2014, January 26, 2015, February 13, 2015, and May 12, 2015, the Company received separate letters from shareholders requesting that the Company investigate or pursue derivative claims against certain officers and directors related to the November 2014 Announcement (the “Derivative Claims”). Although these demands do not identify any claims against the Company, the Company has certain obligations to advance expenses and provide indemnification to certain current and former officers and directors of the Company. The Company has also incurred expenses as a result of costs arising from the investigation of the claims alleged in the various demands.

Following the Company’s receipt of the Derivative Claims, it entered into a series of tolling agreements with the shareholders from whom it received demands (the “Demand Shareholders”). The last of these tolling agreements ended in March of 2017. On October 13, 2017, one of the Demand Shareholders filed an action in the United States District Court for the Middle District of Florida, currently styled Molloy v. Boynton, et al., Civil Action No. 3:17-cv-01157-TJC-MCR (the “Derivative Lawsuit”). The complaint alleges breaches of fiduciary duties and unjust enrichment and names as defendants former officers, Paul G. Boynton, Hans E. Vanden Noort and N. Lynn Wilson, and former directors, C. David Brown, II, Mark E. Gaumond, James H. Miller, Thomas I. Morgan and Ronald Townsend (the former officers and directors named as defendants are collectively the “Individual Defendants”).
In November 2017, the parties reached an agreement to resolve all claims brought in the Derivative Lawsuit and agreed to negotiate in good faith regarding the amount of attorneys’ fees and expenses to be paid to the Demand Shareholders’ counsel, subject to court approval. The parties executed a term sheet on November 27, 2017, and agreed to schedule a mediation regarding the amount of attorneys’ fees and expenses. On November 30, 2017, Rayonier and certain of the Individual Defendants who had been served with the complaint filed an unopposed Motion to Stay or, in the Alternative, to Extend Time to Respond to the Complaint in order to allow the parties time to attempt to resolve the Derivative Lawsuit without further litigation. On December 6, 2017, the Court entered an order staying the case, directing that the case be administratively closed, and ordering the parties to file a joint status report with the Court not later than March 15, 2018. At December 31, 2017, the case was stayed, some of the Individual Defendants had not yet been served, none of the defendants had filed any responsive pleading or dispositive motion, and the Company could not determine whether there was a likelihood a material loss had been incurred nor could the range of any such loss be estimated.
On March 13, 2018, the Demand Shareholders, Rayonier, certain of Rayonier’s directors’ and officers’ insurance carriers, and certain of the Individual Defendants participated in a mediation, at the conclusion of which the parties reached an agreement in principle to settle the case and amended the term sheet to memorialize such agreement. On April 17, 2018, Plaintiff filed with the Court Plaintiff’s Unopposed Motion for Preliminary Approval of Derivative Settlement and Memorandum of Legal Authority in Support (“Motion for Preliminary Approval”). The terms of the proposed settlement (the “Settlement”) are contained in the Stipulation and Agreement of Settlement (the “Stipulation”), which was attached to the Motion for Preliminary Approval and filed with the Court. The Stipulation, executed by all parties, included the material terms of the term sheet. Pursuant to the terms of the Settlement, which is subject to Court approval and objections by shareholders, the Company agreed to certain governance reforms and to cause certain of its directors’ and officers’ liability insurance carriers to fund a settlement payment for the Demand Shareholders’ attorneys’ fees and expenses as well as incentive awards to the Demand Shareholders in the aggregate amount of $1.995 million. The payments agreed to on March 13, 2018, including the realized amount to be funded by the insurance carriers, were reflected in the Company’s Consolidated Financial Statements as of March 31, 2018.
The Company has also 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 large deductible insurance plans, primarily in the areas of executive risk, property, automobile and general liability. These pending 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 CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

10.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies.
As of March 31, 2018, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Associated Liability
Standby letters of credit (a)
 

$10,353

 

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
1,284

 

Total financial commitments
 

$13,891

 

$43

 
 
 
 
 
(a)
Approximately $9.2 million of the standby letters of credit serve as credit support for infrastructure at the Company’s Wildlight development project. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation. These letters of credit will expire at various dates during 2018 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At March 31, 2018, the Company has a de minimis 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 outstanding claims under the Company’s previous workers’ compensation self-insurance programs in Washington and Florida. Rayonier has also obtained performance bonds to secure the development activity at the Company’s Wildlight development project. These surety bonds expire at various dates during 2018 and 2019 and are expected to be renewed as required.

11.    EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
Three Months Ended March 31,
 
2018
 
2017
Net Income

$42,706

 

$35,083

Less: Net income attributable to noncontrolling interest
2,167

 
1,240

Net income attributable to Rayonier Inc.

$40,539

 

$33,843

 
 
 
 
Shares used for determining basic earnings per common share
128,801,210

 
123,587,901

Dilutive effect of:
 
 
 
Stock options
78,475

 
106,690

Performance and restricted shares
672,712

 
228,275

Shares used for determining diluted earnings per common share
129,552,397

 
123,922,866

 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:

$0.31

 

$0.27

 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:

$0.31

 

$0.27


 
Three Months Ended March 31,
 
2018
 
2017
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
Stock options
171,819

 
592,653



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

12.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks.
Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented.
FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS
The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2018, foreign currency exchange contracts and foreign currency option contracts had maturity dates through May 2019 and March 2019, respectively.
Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.
The New Zealand JV is exposed to foreign currency risk when making shareholder loan payments which are denominated in U.S. dollars. The New Zealand JV typically hedges 60% to 100% of its estimated foreign currency exposure with respect to the following three months forecasted distributions, up to 75% of forecasted distributions for the forward three to six months and up to 50% of the forward six to 12 months. For the three months ended March 31, 2018, the change in fair value of the foreign exchange forward contracts of $0.1 million was recorded in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of March 31, 2018, foreign exchange forward contracts had maturity dates through December 2018.
 

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

In March 2018, the Company entered into a foreign currency exchange contract (notional amount of NZ$37 million) to mitigate the risk of fluctuations in foreign currency exchange rates when translating the New Zealand JV’s balance sheet to U.S. dollars. This contract hedged the cash portion of the Company’s net investment in New Zealand and qualified as a net investment hedge. The Company intends to repatriate the cash in April 2018. The fair value of this contract was determined by a mark-to-market valuation, which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The hedge qualified for hedge accounting whereby fluctuations in fair market value during the life of the hedge are recorded in AOCI and remain there permanently unless a partial or full liquidation of the investment is made. At each reporting period, the Company reviews the hedge for ineffectiveness. Ineffectiveness can occur when changes to the investment or the hedged instrument are made such that the risk of foreign exchange movements are no longer mitigated by the hedging instrument. At that time, the amount related to the ineffectiveness of the hedge is recorded into earnings. The Company does not expect any ineffectiveness during the life of the hedge. The foreign currency exchange contract matures April 2018.
INTEREST RATE SWAPS
The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.
The following table contains information on the outstanding interest rate swaps as of March 31, 2018:
Outstanding Interest Rate Swaps (a)
Date Entered Into
Term
Notional Amount
Related Debt Facility
Fixed Rate of Swap
Bank Margin on Debt
Total Effective Interest Rate (b)
August 2015
9 years
$170,000
Term Credit Agreement
2.20
%
1.63
%
3.83
%
August 2015
9 years
180,000
Term Credit Agreement
2.35
%
1.63
%
3.98
%
April 2016
10 years
100,000
Incremental Term Loan
1.60
%
1.90
%
3.50
%
April 2016
10 years
100,000
Incremental Term Loan
1.60
%
1.90
%
3.50
%
July 2016
10 years
100,000
Incremental Term Loan
1.26
%
1.90
%
3.16
%
 
 
 
 
 
(a)
All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.
(b)
Rate is before estimated patronage payments.


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

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2018 and 2017.
 
 
 
Three Months Ended March 31,
 
Income Statement Location
 
2018
 
2017
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income
 

$1,233

 

($71
)
Foreign currency option contracts
Other comprehensive income
 
181

 
(41
)
Interest rate swaps
Other comprehensive income
 
15,598

 
2,633

 
 
 
 
 
 
Derivatives designated as a net investment hedge:
 
 
 
 
Foreign currency exchange contract
Other comprehensive income
 
110

 

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Interest and other miscellaneous income, net
 
129

 
125

During the next 12 months, the amount of the March 31, 2018 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a gain of approximately $3.0 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount
 
March 31, 2018
 
December 31, 2017
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$87,400

 

$107,400

Foreign currency option contracts
34,000

 
48,000

Interest rate swaps
650,000

 
650,000

 
 
 
 
Derivatives designated as a net investment hedge:
 
 
 
Foreign currency exchange contract
26,788

 

 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
Foreign currency exchange contracts
25,883

 
18,439



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

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Location on Balance Sheet
 
Fair Value Assets / (Liabilities) (a)
 
 
 
March 31, 2018
 
December 31, 2017
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 

$3,736

 

$2,286

 
Other assets
 
304

 
538

 
Other current liabilities
 
(21
)
 
(37
)
Foreign currency option contracts
Other current assets
 
572

 
389

 
Other assets
 

 
137

 
Other current liabilities
 
(68
)
 
(119
)
 
Other non-current liabilities
 

 
(55
)
Interest rate swaps
Other assets
 
31,037

 
17,473

 
Other non-current liabilities
 

 
(2,033
)
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
Foreign currency exchange contract
Other current assets
 
110

 

 
 
 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
238

 
209

 
Other current liabilities
 
(155
)
 
(189
)
 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Other current assets
 
 

$4,656

 

$2,884

Other assets
 
 
31,341

 
18,148

Total derivative assets
 
 

$35,997

 

$21,032

 
 
 
 
 
 
Other current liabilities
 
 
(244
)
 
(345
)
Other non-current liabilities
 
 

 
(2,088
)
Total derivative liabilities
 
 

($244
)
 

($2,433
)
 
 
 
 
 
(a)
See Note 13 — Fair Value Measurements for further information on the fair value of the Company’s derivatives including their classification within the fair value hierarchy.
OFFSETTING DERIVATIVES
Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. The Company’s derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.


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

13.
FAIR VALUE MEASUREMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
A three-level hierarchy that prioritizes the inputs used to measure fair value was established in the Accounting Standards Codification as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. (a)
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at March 31, 2018 and December 31, 2017, using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
 
March 31, 2018
 
December 31, 2017
Asset (Liability) (a)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
Level 1
 
Level 2
 
 
Level 1
 
Level 2
Cash and cash equivalents

$92,785

 

$92,785

 

 

$112,653

 

$112,653

 

Restricted cash (b)
84,903

 
84,903

 

 
59,703

 
59,703

 

Current maturities of long-term debt

 

 

 
(3,375
)
 

 
(3,375
)
Long-term debt (c)
(996,145
)
 

 
(999,910
)
 
(1,022,004
)
 

 
(1,030,135
)
Interest rate swaps (d)
31,037

 

 
31,037

 
15,440

 

 
15,440

Foreign currency exchange contracts (d)
4,212

 

 
4,212

 
2,807

 

 
2,807

Foreign currency option contracts (d)
505

 

 
505

 
352

 

 
352

 
 
 
 
 
(a)
The Company did not have Level 3 assets or liabilities at March 31, 2018 and December 31, 2017.
(b)
Restricted cash represents the proceeds from like-kind exchange sales deposited with a third-party intermediary and cash held in escrow for a real estate sale. See Note 17 — Restricted Cash for additional information.
(c)
The carrying amount of long-term debt is presented net of capitalized debt costs on non-revolving debt.
(d)
See Note 12 — Derivative Financial Instruments and Hedging Activities for information regarding the Consolidated Balance Sheets classification of the Company’s derivative financial instruments.
Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents and Restricted cash — The carrying amount is equal to fair market value.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.
Interest rate swap agreements — The fair value of interest rate contracts is determined by discounting the expected future cash flows, for each instrument, at prevailing interest rates.
Foreign currency exchange contracts — The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.
Foreign currency option contracts — The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.


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

14.
EMPLOYEE BENEFIT PLANS
The Company has one qualified non-contributory defined benefit pension plan covering a portion of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plan. Both plans are closed to new participants. Effective December 31, 2016, the Company froze benefits for all employees participating in the pension plan. In lieu of the pension plan, the Company provides those employees with an enhanced 401(k) plan match. 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.
As of March 31, 2018, the Company has paid $0.5 million of the approximately $2.9 million in current year mandatory pension contribution requirements (based on actuarially determined estimates and IRS minimum funding requirements).
The net pension and postretirement benefit (credit) costs that have been recorded are shown in the following table:
Components of Net Periodic Benefit (Credit) Cost
Income Statement Location (a)
 
Pension
 
Postretirement
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
Components of Net Periodic Benefit (Credit) Cost
 
 
 
 
 
 
 
 
 
Service cost
Selling and general expenses
 

 

 

$2

 

$2

Interest cost
Interest and other miscellaneous income, net
 
751

 
815

 
12

 
13

Expected return on plan assets (b)
Interest and other miscellaneous income, net
 
(982
)
 
(945
)
 

 

Amortization of losses
Interest and other miscellaneous income, net
 
159

 
116

 
1

 

Net periodic benefit (credit) cost