Rayonier 2013 10Q 2Q2013
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 June 30, 2013
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 July 18, 2013, there were outstanding 126,119,760 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
 
6.
 
 
 
 

i


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 June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
SALES
$
409,077

 
$
348,096

 
$
802,796

 
$
684,667

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
297,698

 
243,571

 
563,716

 
479,279

Selling and general expenses
16,929

 
15,892

 
33,028

 
35,157

Other operating expense (income), net
291

 
(5,295
)
 
(3,212
)
 
(6,433
)
 
314,918

 
254,168

 
593,532

 
508,003

Equity in income of New Zealand joint venture
304

 
170

 
562

 
184

OPERATING INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
94,463

 
94,098

 
209,826

 
176,848

Gain related to consolidation of New Zealand joint venture (Note 6)
16,098

 

 
16,098

 

OPERATING INCOME
110,561

 
94,098

 
225,924

 
176,848

Interest expense
(10,019
)
 
(16,056
)
 
(17,736
)
 
(27,880
)
Interest and miscellaneous income, net
2,598

 
84

 
2,656

 
60

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
103,140

 
78,126

 
210,844

 
149,028

Income tax expense
(15,249
)
 
(12,035
)
 
(19,695
)
 
(30,338
)
INCOME FROM CONTINUING OPERATIONS
87,891

 
66,091

 
191,149

 
118,690

DISCONTINUED OPERATIONS, NET (Note 2)
 
 
 
 
 
 
 
Income from discontinued operations, net of income tax expense of $0, $1,505, $22,273 and $1,927

 
2,988

 
44,477

 
3,825

NET INCOME
87,891

 
69,079

 
235,626

 
122,515

Net income attributable to noncontrolling interest
727

 

 
727

 

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
87,164

 
69,079

 
234,899

 
122,515

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
Foreign currency translation adjustment
(28,201
)
 
(8,081
)
 
(27,226
)
 
(2,255
)
New Zealand joint venture cash flow hedges
222

 
(1,998
)
 
775

 
(793
)
Amortization of pension and postretirement plans, net of income tax expense of $1,620, $1,482, $3,824 and $2,850
3,717

 
3,401

 
8,687

 
6,541

Total other comprehensive (loss) income
(24,262
)
 
(6,678
)
 
(17,764
)
 
3,493

COMPREHENSIVE INCOME
63,629

 
62,401

 
217,862

 
126,008

Comprehensive loss attributable to noncontrolling interest
(9,505
)
 

 
(9,505
)
 

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
73,134

 
$
62,401

 
$
227,367

 
$
126,008

EARNINGS PER COMMON SHARE (Note 3)
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.69

 
$
0.54

 
$
1.52

 
$
0.97

Discontinued Operations

 
0.02

 
0.36

 
0.03

Net Income
$
0.69

 
$
0.56

 
$
1.88

 
$
1.00

DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.67

 
$
0.52

 
$
1.46

 
$
0.93

Discontinued Operations

 
0.02

 
0.34

 
0.03

Net Income
$
0.67

 
$
0.54

 
$
1.80

 
$
0.96


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
June 30, 2013
 
December 31, 2012
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
343,581

 
$
280,596

Accounts receivable, less allowance for doubtful accounts of $685 and $417
116,538

 
100,359

Inventory
 
 
 
Finished goods
79,121

 
103,568

Work in progress
3,047

 
4,446

Raw materials
14,620

 
17,602

Manufacturing and maintenance supplies
2,303

 
2,350

Total inventory
99,091

 
127,966

Deferred tax assets
55,563

 
15,845

Prepaid and other current assets
67,444

 
41,508

Total current assets
682,217

 
566,274

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,080,611

 
1,573,309

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
22,996

 
27,383

Buildings
166,578

 
147,445

Machinery and equipment
1,644,945

 
1,444,012

Construction in progress
123,621

 
268,459

Total property, plant and equipment, gross
1,958,140

 
1,887,299

Less — accumulated depreciation
(1,105,708
)
 
(1,180,261
)
      Total property, plant and equipment, net
852,432

 
707,038

INVESTMENT IN JOINT VENTURE (Note 6)

 
72,419

OTHER ASSETS
212,791

 
203,911

TOTAL ASSETS
$
3,828,051

 
$
3,122,951

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable
$
133,255

 
$
70,381

Current maturities of long-term debt
75,463

 
150,000

Accrued taxes
20,158

 
13,824

Accrued payroll and benefits
20,489

 
28,068

Accrued interest
9,835

 
7,956

Accrued customer incentives
10,743

 
10,849

Other current liabilities
51,842

 
18,640

Current liabilities for dispositions and discontinued operations (Note 13)
8,686

 
8,105

Total current liabilities
330,471

 
307,823

LONG-TERM DEBT
1,591,834

 
1,120,052

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 13)
69,442

 
73,590

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 15)
158,594

 
159,582

OTHER NON-CURRENT LIABILITIES
27,590

 
23,900

COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 14)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 126,119,760 and 123,332,444 shares issued and outstanding
679,803

 
670,749

Retained earnings
1,000,647

 
876,634

Accumulated other comprehensive loss
(116,911
)
 
(109,379
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,563,539

 
1,438,004

Noncontrolling interest
86,581

 

TOTAL SHAREHOLDERS’ EQUITY
1,650,120

 
1,438,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
3,828,051

 
$
3,122,951


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
235,626

 
$
122,515

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
79,659

 
64,592

Non-cash cost of real estate sold
2,593

 
2,401

Stock-based incentive compensation expense
6,226

 
9,460

Amortization of debt discount/premium
837

 
3,863

Deferred income taxes
38,107

 
(15,044
)
Tax benefit of AFMC for CBPC exchange
(18,761
)
 

Amortization of losses from pension and postretirement plans
11,617

 
9,391

Gain on sale of discontinued operations, net
(42,670
)
 

Gain related to consolidation of New Zealand joint venture
(16,098
)
 

Other
(8,936
)
 
(586
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(11,782
)
 
(13,773
)
Inventories
27,325

 
7,096

Accounts payable
19,535

 
(9,518
)
Income tax receivable/payable
(5,626
)
 
31,758

All other operating activities
(7,654
)
 
1,524

Payment to exchange AFMC for CBPC
(70,311
)
 

Expenditures for dispositions and discontinued operations
(4,015
)
 
(4,803
)
CASH PROVIDED BY OPERATING ACTIVITIES
235,672

 
208,876

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(94,126
)
 
(76,246
)
Purchase of additional interest in New Zealand joint venture
(139,879
)
 

Purchase of timberlands
(10,447
)
 
(8,687
)
Jesup mill cellulose specialties expansion (gross purchases of $114,449 and $72,662, net of purchases on account of $14,264 and $8,664)
(100,185
)
 
(63,998
)
Proceeds from disposition of Wood Products business, net of income tax payments of $11,137
72,953

 

Change in restricted cash
7,603

 
(14,427
)
Other
20,076

 
(704
)
CASH USED FOR INVESTING ACTIVITIES
(244,005
)
 
(164,062
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
455,000

 
355,000

Repayment of debt
(273,087
)
 
(188,110
)
Dividends paid
(113,222
)
 
(98,201
)
Proceeds from the issuance of common shares
6,643

 
3,980

Excess tax benefits on stock-based compensation
7,399

 
4,234

Debt issuance costs

 
(3,653
)
Repurchase of common shares
(11,241
)
 
(7,783
)
CASH PROVIDED BY FINANCING ACTIVITIES
71,492

 
65,467

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(174
)
 
219

CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
62,985

 
110,500

Balance, beginning of year
280,596

 
78,603

Balance, end of period
$
343,581

 
$
189,103

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period:
 
 
 
Interest
$
16,754

 
$
10,936

Income taxes
$
84,508

 
$
10,989

Non-cash investing activity:
 
 
 
Capital assets purchased on account
$
59,729

 
$
30,175

Non-cash financing activity:
 
 
 
Shareholder debt assumed in acquisition of New Zealand joint venture
$
125,532

 
$

Conversion of shareholder debt to equity noncontrolling interest
$
(95,961
)
 
$


See Notes to Consolidated Financial Statements.

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Table of Contents

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


1.
BASIS OF PRESENTATION
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 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 (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, 2012, as filed with the SEC.
Reclassifications
Certain 2012 amounts have been reclassified to agree with the current year presentation. See Note 2Sale of Wood Products Business for information regarding reclassifications for discontinued operations.
New Accounting Standards
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires enhanced disclosures about assets and liabilities that are subject to a master netting agreement or when the right of offset exists. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This pronouncement limits the scope of ASU No. 2011-1. The standards’ disclosure requirements are retrospective and were effective beginning in first quarter 2013. See Note 9Derivative Financial Instruments and Hedging Activities for the disclosures required under this guidance.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This standard requires reporting, in one place, information about reclassifications out of AOCI by component. An entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount is reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified to net income in their entirety, an entity is required to cross-reference to other currently required disclosures that provide additional detail about those amounts. The information required by this standard must be presented in one place, either parenthetically on the face of the financial statements by income statement line item or in a note. See Note 17Accumulated Other Comprehensive Loss for the disclosures required under this guidance.
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard requires a parent entity to release a related foreign entity’s cumulative translation adjustment into net income only if its sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The cumulative translation adjustment should be released into net income if the transaction results in the loss of a controlling financial interest in a foreign entity or results in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. ASU No. 2013-05 will be effective for first quarter 2014. The Company does not expect that the adoption of this standard will have a material impact on the consolidated financial statements.
Subsequent Events
The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued, and two subsequent events were identified that warranted disclosure. On July 19, 2013, the Board of Directors approved an increase in the quarterly dividend per share from $0.44 per share to $0.49 per share effective for the third quarter 2013 distribution. Additionally, the New Zealand JV negotiated an amendment to its debt facility, as discussed in Note 16Debt.


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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)

2.
SALE OF WOOD PRODUCTS BUSINESS
On March 1, 2013, Rayonier completed the sale of its Wood Products business (consisting of three lumber mills in Baxley, Swainsboro and Eatonton, Georgia) to International Forest Products Limited (“Interfor”) for $80 million plus a working capital adjustment. The sale is consistent with the Company’s strategic plan to fully position its manufacturing operations in the specialty chemicals sector. Rayonier will not have significant continuing involvement in the operations of the Wood Products business. Accordingly, the operating results of the Wood Products business, formerly reported as a separate operating segment, are classified as discontinued operations in the Company’s Consolidated Statements of Income and Comprehensive Income for all periods presented. Certain administrative and general costs historically allocated to the Wood Products segment, which will remain with the Company after the sale, are reported in continuing operations.

Rayonier recognized an after-tax gain of $42.7 million on the sale. The gain is included in “Income from discontinued operations, net” on the Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2013.

The following table summarizes the operating results of the Company’s discontinued operations and the related gain for the three and six months ended June 30, 2013 and 2012, as presented in “Income from discontinued operations, net” in the Consolidated Statements of Income and Comprehensive Income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Sales
$

 
$
23,830

 
$
16,968

 
$
43,039

Cost of sales and other

 
(19,337
)
 
(14,258
)
 
(37,287
)
Gain on sale of discontinued operations

 

 
64,040

 

Income from discontinued operations before income taxes

 
4,493

 
66,750

 
5,752

Income tax expense

 
(1,505
)
 
(22,273
)
 
(1,927
)
Income from discontinued operations, net
$

 
$
2,988

 
$
44,477

 
$
3,825


The sale did not meet the “held for sale” criteria prior to the period it was completed. The major classes of Wood Products assets and liabilities included in the sale were as follows:
 
March 1, 2013
Accounts receivable, net
$
4,127

Inventory
4,270

Prepaid and other current assets
2,053

Property, plant and equipment, net
9,990

Total assets
$
20,440

 
 
Total liabilities
$
596


Cash flows from discontinued operations are immaterial both individually and in the aggregate. As such, they are included with cash flows from continuing operations in the Consolidated Statements of Cash Flows.
Pursuant to the purchase and sale agreement, Rayonier will provide Interfor with saw timber procurement services for the three lumber mills through December 31, 2013. Rayonier also contracted with Interfor to purchase wood chips produced at the lumber mills for use at Rayonier’s Jesup mill and market other wood chips produced by the mills to third parties on Interfor’s behalf. The Company will purchase 100 percent of the Baxley mill chips for five years and 25 percent of the Swainsboro mill chips through 2013. The purchase price of these chips will be based on the average price paid by the Company to unrelated third parties.

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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)

Prior to the Wood Products sale, saw timber procurement services for and wood chip purchases from the lumber mills were intercompany transactions eliminated in consolidation as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Wood chip purchases
$

 
$
3,003

 
$
1,650

 
$
6,237

Saw timber procurement services

 
287

 
223

 
574

Total intercompany
$

 
$
3,290

 
$
1,873

 
$
6,811


3.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Income from continuing operations
$
87,891

 
$
66,091

 
$
191,149

 
$
118,690

Income from continuing operations attributable to noncontrolling interest
727

 

 
727

 

Income from continuing operations attributable to Rayonier Inc.
$
87,164

 
$
66,091

 
$
190,422

 
$
118,690

 
 
 
 
 
 
 
 
Income from discontinued operations attributable to Rayonier Inc.
$

 
$
2,988

 
$
44,477

 
$
3,825

 
 
 
 
 
 
 
 
Net income attributable to Rayonier Inc.
$
87,164

 
$
69,079

 
$
234,899

 
$
122,515

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per common share
126,027,297

 
122,455,464

 
125,257,876

 
122,403,388

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
504,321

 
669,298

 
519,014

 
692,622

Performance and restricted shares
386,228

 
726,368

 
384,910

 
727,968

Assumed conversion of Senior Exchangeable Notes (a)
2,217,058

 
2,669,808

 
2,173,658

 
2,830,382

Assumed conversion of warrants (a) (b)
1,632,345

 
890,189

 
2,250,361

 
1,077,217

Shares used for determining diluted earnings per common share
130,767,249

 
127,411,127

 
130,585,819

 
127,731,577

Basic earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.69

 
$
0.54

 
$
1.52

 
$
0.97

Discontinued operations

 
0.02

 
0.36

 
0.03

Net income
$
0.69

 
$
0.56

 
$
1.88

 
$
1.00

Diluted earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.67

 
$
0.52

 
$
1.46

 
$
0.93

Discontinued operations

 
0.02

 
0.34

 
0.03

Net income
$
0.67

 
$
0.54

 
$
1.80

 
$
0.96


6


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
 
 
 
 
Stock options, performance and restricted shares
199,245

 
318,666

 
207,097

 
326,777

Assumed conversion of exchangeable note hedges (a)
2,217,058

 
2,669,808

 
2,173,658

 
2,830,382

Total
2,416,303

 
2,988,474

 
2,380,755

 
3,157,159

(a) The Senior Exchangeable Notes due 2012 (the “2012 Notes”) matured in October 2012; however, no additional shares were issued due to offsetting exchangeable note hedges. Similarly, Rayonier will not issue additional shares upon maturity of the Senior Exchangeable Notes due 2015 (the “2015 Notes”) due to offsetting hedges. 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 is excluded since they are anti-dilutive. As such, the dilutive effect of the assumed conversion of the 2012 Notes was only included for the three and six months ended June 30, 2012, while the effect of the 2015 Notes was included for all periods presented.
The warrants sold in conjunction with the 2012 Notes began maturing on January 15, 2013 and matured ratably through March 27, 2013. As a result, 2,037,303 shares were issued through the end of the first quarter and 97,918 shares were issued in the first week of April. The dilutive impact of these warrants was calculated based on the length of time they were outstanding before settlement. Rayonier will distribute additional shares upon maturity of the warrants for the 2015 Notes if the stock price exceeds $39.35 per share. For information on the potential dilutive impact of the Senior Exchangeable Notes, warrants and exchangeable note hedges, see Note 11 — Debt in the 2012 Annual Report on Form 10-K and Note 16Debt of this Form 10-Q.
(b) The higher shares used for the assumed conversion of the warrants were primarily due to an increase in the average stock price from $43.74 for the three months ended June 30, 2012 to $57.15 for the three months ended June 30, 2013 and from $44.40 for the six months ended June 30, 2012 to $56.34 for the six months ended June 30, 2013. The impact of the higher stock price was partially offset by a decrease in dilutive shares due to the maturity of the warrants on the Notes due 2012.

4.
INCOME TAXES
Rayonier is a real estate investment trust (“REIT”). In general, only its taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities, and foreign operations are subject to corporate income taxes. However, the Company was 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. In 2011, the law provided a built-in-gains tax holiday. In 2013, the law provided a built-in gains tax holiday for 2012 (retroactive) and 2013. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries’ income and foreign operations.
Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”)
The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. The AFMC is a $.50 per gallon refundable tax credit (which is not taxable), while the CBPC is a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity’s tax liability. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida performance fibers mills, which qualified for both credits. The Company claimed the AFMC on its 2009 tax return.
In the first quarter of 2013 and the second quarter of 2012, management approved the exchange of approximately 120 million and 60 million gallons respectively, of black liquor previously claimed for the AFMC for the CBPC. As a result, the Company recorded a $19 million tax benefit in first quarter 2013. The second quarter 2012 impact of the exchange was a $9.1 million tax benefit partially offset by a $3.4 million interest expense accrual. The IRS later released guidance stating interest payments are not required for AFMC funds exchanged for the CBPC, based upon the manner of the Company's original claim. As such, Rayonier subsequently reversed the interest expense in third quarter 2012. For additional information on the AFMC and CBPC, see Note 8 — Income Taxes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Provision for Income Taxes from Continuing Operations
The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. The Company’s effective tax rate in 2013 was lower than 2012 primarily due to recording the additional AFMC exchange, the federal research and experimentation tax credit and a $4.9 million benefit associated with the completion of an

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

internal transfer of properties.
The table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented (in millions of dollars):
 
Three Months Ended June 30,
 
2013
 
2012
Income tax expense at federal statutory rate
$
36

 
35.0
 %
 
$
27

 
35.0
 %
REIT income not subject to tax
(15
)
 
(14.3
)
 
(6
)
 
(8.7
)
Income tax expense before discrete items
21

 
20.7
 %
 
21

 
26.3
 %
Exchange of AFMC for CBPC

 

 
(9
)
 
(10.9
)
Other
(6
)
 
(5.9
)
 

 

Income tax expense as reported
$
15

 
14.8
 %
 
$
12

 
15.4
 %

 
Six Months Ended June 30,
 
2013
 
2012
Income tax expense at federal statutory rate
$
74

 
35.0
 %
 
$
52

 
35.0
 %
REIT income not subject to tax
(26
)
 
(12.4
)
 
(12
)
 
(8.1
)
Other
(2
)
 
(0.7
)
 
(1
)
 
(0.5
)
Income tax expense before discrete items
46

 
21.9
 %
 
39

 
26.4
 %
Exchange of AFMC for CBPC
(19
)
 
(8.9
)
 
(9
)
 
(6.0
)
Gain related to consolidation of New Zealand joint venture
(5
)
 
(2.7
)
 

 

Other
(2
)
 
(1.0
)
 

 

Income tax expense as reported
$
20

 
9.3
 %
 
$
30

 
20.4
 %
Provision for Income Taxes from Discontinued Operations
In the first quarter, Rayonier completed the sale of its Wood Products business for $80 million plus a working capital adjustment. For the six months ended June 30, 2013 and 2012, income tax expense related to discontinued operations was $22.3 million ($21.4 million from the gain on sale) and $1.9 million, respectively. For the three months ended June 30, 2012, income tax related to discontinued operations was $1.5 million. See Note 2Sale of Wood Products Business for additional information.

5.
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 LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of June 30, 2013 and December 31, 2012, the Company had $3.0 million and $10.6 million, respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

6.
JOINT VENTURE INVESTMENT
On April 4, 2013 (the “acquisition date”), the Company acquired an additional 39 percent ownership interest in Matariki Forestry Group, a joint venture (“JV”) that owns or leases approximately 0.3 million acres of New Zealand timberlands. As a result of the acquisition, Rayonier is a 65 percent owner of the JV and 100 percent of the results of its operations subsequent to April 4, 2013 have been included in the Company’s consolidated financial statements, along with 100 percent of the JV’s assets and liabilities at June 30, 2013. The portions of the consolidated financial position and results of operations attributable to the JV’s 35 percent noncontrolling interest are also shown separately. Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier Inc., continues to serve as the manager of the JV forests and operates a log trading business.
The purchase price of the additional interest in the JV was $139.9 million, which included $3.3 million of contingent consideration and was financed through our term credit agreement. As the purchase price was in New Zealand dollars, the Company

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

purchased foreign currency forward contracts to mitigate foreign currency risk on the purchase price. As a result, the Company recorded a benefit of $1.7 million and received that amount upon maturity of the contracts on April 2, 2013.
The contingent consideration arrangement required the Company to pay an additional consideration to the JV’s selling (former) shareholders equal to a multiple of the increase in log prices for a six month period beginning in November 2012. We estimated the fair value of the contingent consideration arrangement at the acquisition date to be $3.3 million. Fair value was determined using an average of the cost and freight (CFR) selling price of China A-grade 3.8 meter logs. As of June 30, 2013, the contingent consideration had been determined and paid in the amount of $3.3 million.
Prior to the acquisition date, the Company accounted for its 26 percent interest in the JV as an equity method investment. The additional 39 percent interest acquired resulted in the Company obtaining a controlling financial interest in the JV and accordingly, the purchase was accounted for as a step-acquisition. Upon consolidation, the Company recognized a $10.1 million deferred gain, which resulted from the original sale of its New Zealand operations to the joint venture in 2005 and a $6 million benefit due to the required fair market value remeasurement of the Company’s equity interest in the JV held before the purchase of the additional interest. Both gains are included in the line item “Gain related to consolidation of New Zealand joint venture” in the Consolidated Statements of Income and Comprehensive Income. The acquisition-date fair value of the previous equity interest was $93.3 million.
We have applied estimates and judgments in order to determine the fair value of assets acquired and liabilities assumed at the acquisition date. In determining fair value we utilized valuation methodologies including discounted cash flow analysis. The assumptions made in performing these valuations include assumptions as to discount rates, foreign exchange rates, and commodity prices. Any significant change in key assumptions may cause the acquisition accounting to be revised.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
 
April 4, 2013
Accounts receivable, net
$
9,777

Inventory
2,465

Other current assets
6,767

Timber and timberlands, net
545,287

Other assets
25,436

Total identifiable assets acquired
589,732

Accounts payable
11,679

Current maturities of long-term debt
3,843

Accrued interest
2,038

Other current liabilities
3,624

Long-term debt (third party)
196,319

Long-term debt (shareholders) (a)
125,532

Other non-current liabilities
13,565

Total liabilities assumed
356,600

Net identifiable assets
233,132

Less: Fair value of equity method investment
(93,253
)
Purchase price
$
139,879

(a) Long-term debt included $125.5 million of shareholder loans payable to the noncontrolling interest by the JV. Subsequent to the acquisition date, $96.0 million of the noncontrolling interest’s shareholder loans were converted to preferred equity.

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

The Company’s operating results for the three and six months ended June 30, 2013 reflect 26 percent of the JV’s income prior to the acquisition date, as reported in “Equity in income of New Zealand joint venture” in the Consolidated Statements of Income and Comprehensive Income. The amounts of revenue and earnings of the JV included in the Company’s Consolidated Statements of Income and Comprehensive Income from the acquisition date to the period ended June 30, 2013 are as follows:
 
Revenue and earnings from
 April 4, 2013 to June 30, 2013
Sales
$
47,426

Net Income
2,076

The following represents the pro forma consolidated sales and net income as if the JV had been included in the consolidated results of the Company for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Sales
$
409,077

 
$
399,228

 
$
837,322

 
$
778,810

Net Income
$
87,891

 
$
67,376

 
$
233,867

 
$
118,730



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

7.
SHAREHOLDERS’ EQUITY
 An analysis of shareholders’ equity for the six months ended June 30, 2013 and the year ended December 31, 2012 is shown below (share amounts not in thousands):
 
Rayonier Inc. Shareholders
 
 
 
 
 
Common Shares
 
Retained
Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Non-controlling Interest
 
Total Shareholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2011
122,035,177

 
$
630,286

 
$
806,235

 
$
(113,448
)
 
$

 
$
1,323,073

Net income

 

 
278,685

 

 

 
278,685

Dividends ($1.68 per share)

 

 
(208,286
)
 

 

 
(208,286
)
Issuance of shares under incentive stock plans
1,467,024

 
25,495

 

 

 

 
25,495

Stock-based compensation

 
15,116

 

 

 

 
15,116

Excess tax benefit on stock-based compensation

 
7,635

 

 

 

 
7,635

Repurchase of common shares
(169,757
)
 
(7,783
)
 

 

 

 
(7,783
)
Net loss from pension and postretirement plans

 

 

 
(496
)
 

 
(496
)
Foreign currency translation adjustment

 

 

 
4,352

 

 
4,352

Joint venture cash flow hedges

 

 

 
213

 

 
213

Balance, December 31, 2012
123,332,444

 
$
670,749

 
$
876,634

 
$
(109,379
)
 
$

 
$
1,438,004

Acquisition of noncontrolling interest

 

 

 

 
96,086

 
96,086

Net income

 

 
234,899

 

 
727

 
235,626

Dividends ($0.88 per share)

 

 
(110,886
)
 

 

 
(110,886
)
Issuance of shares under incentive stock plans
861,838

 
6,643

 

 

 

 
6,643

Stock-based compensation

 
6,253

 

 

 

 
6,253

Excess tax benefit on stock-based compensation

 
7,399

 

 

 

 
7,399

Repurchase of common shares
(209,743
)
 
(11,241
)
 

 

 

 
(11,241
)
Settlement of warrants (Note 16)
2,135,221

 

 

 

 

 

Amortization of pension and postretirement plans

 

 

 
8,687

 

 
8,687

Foreign currency translation adjustment

 

 

 
(17,650
)
 
(9,576
)
 
(27,226
)
Joint venture cash flow hedges

 

 

 
1,431

 
(656
)
 
775

Balance, June 30, 2013
126,119,760

 
$
679,803

 
$
1,000,647

 
$
(116,911
)
 
$
86,581

 
$
1,650,120

 

8.
SEGMENT AND GEOGRAPHICAL INFORMATION
Rayonier operates in three reportable business segments: Forest Resources, Real Estate and Performance Fibers. Prior to the first quarter of 2013, the Company operated in four reportable business segments, which included Wood Products. In March 2013, the Company sold its Wood Products business and its operations are shown as discontinued operations for all periods presented. See Note 2Sale of Wood Products Business for additional information. On April 4, 2013, Rayonier acquired an additional 39 percent interest in the JV, bringing its total ownership to 65 percent. As a result, the JV’s results of operations have been consolidated and included within the Forest Resources segment since April 4, when the Company acquired control of the entity. Accordingly, the JV’s assets and liabilities are fully consolidated at June 30, 2013. See Note 6Joint Venture Investment for further information regarding the Company’s joint venture.
Forest Resources sales include all activities related 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 Company’s remaining operations include harvesting and selling timber acquired

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

from third parties (log trading). These operations are reported in “Other Operations.” 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 the operating income of the segments.
Operating income (loss) as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income (loss). 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 income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations.
Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:
 
June 30,
 
December 31,
ASSETS
2013
 
2012
Forest Resources
$
2,275,145

 
$
1,690,030

Real Estate
85,018

 
112,647

Performance Fibers
1,067,673

 
902,309

Wood Products (a)

 
18,454

Other Operations
31,045

 
23,296

Corporate and other
369,170

 
376,215

Total
$
3,828,051

 
$
3,122,951

(a)
The Company sold its Wood Products segment during the first quarter of 2013. See Note 2Sale of Wood Products Business for additional information.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
SALES
2013
 
2012
 
2013
 
2012
Forest Resources
$
109,060

 
$
52,663

 
$
166,162

 
$
104,858

Real Estate
13,376

 
11,680

 
37,673

 
24,326

Performance Fibers
253,025

 
254,509

 
537,213

 
505,364

Other Operations
33,872

 
29,268

 
62,099

 
50,409

Intersegment Eliminations (b)
(256
)
 
(24
)
 
(351
)
 
(290
)
Total
$
409,077

 
$
348,096

 
$
802,796

 
$
684,667

(b)
Intersegment eliminations primarily reflect sales from our Forest Resources segment to our Performance Fibers segment.
  
 
Three Months Ended June 30,
 
Six Months Ended June 30,
OPERATING INCOME(LOSS)
2013
 
2012
 
2013
 
2012
Forest Resources
$
20,890

 
$
8,249

 
$
34,145

 
$
16,254

Real Estate
6,105

 
5,999

 
22,947

 
12,477

Performance Fibers
79,081

 
83,727

 
170,751

 
164,357

Other Operations
1,779

 
1,148

 
1,944

 
218

Corporate and other (c)
2,706

 
(5,025
)
 
(3,863
)
 
(16,458
)
Total
$
110,561

 
$
94,098

 
$
225,924

 
$
176,848

(c)
The three and six months ended June 30, 2013 includes a $16.1 million gain related to the consolidation of the New Zealand JV. See Note 6Joint Venture Investment.


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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)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2013
 
2012
 
2013
 
2012
Forest Resources
$
27,291

 
$
17,066

 
$
43,735

 
$
33,900

Real Estate
2,469

 
1,600

 
6,646

 
3,445

Performance Fibers
13,649

 
15,139

 
28,802

 
26,500

Corporate and other
258

 
374

 
476

 
747

Total
$
43,667

 
$
34,179

 
$
79,659

 
$
64,592


9.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates, interest rates and fuel prices. The Company’s New Zealand JV 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 derivatives 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. The ineffective portion of any hedge as well as 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.
Foreign Currency Exchange and Option Contracts
The functional currency of the Company’s New Zealand-based operations and JV is the New Zealand dollar. These operations are exposed to foreign currency risk on export sales and ocean freight payments which are predominately denominated in US dollars. The Company typically hedges at least 70 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases and 50 percent of the forward twelve months.
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.
Interest Rate Swaps
The Company uses interest rate swaps to manage the JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. By converting a portion of these borrowings from floating rates to fixed rates the Company has reduced the impact of interest rate changes on its expected future cash outflows. As of June 30, 2013, the Company’s interest rate contracts had maturity dates through January 2020.
Fuel Hedge Contracts
The Company uses fuel swap contracts to manage its JV’s exposure to changes in New Zealand’s domestic diesel prices. The fuel swaps are quoted by domestic banks in New Zealand dollar price terms. As of June 30, 2013 all of the contracts had maturities of less than one year. The fair value of the fuel swap 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.

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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 demonstrates the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the second quarter and six months ended June 30, 2013:
 
 
 
June 30, 2013
 
Income Statement Location
 
Three Months Ended
 
Six Months Ended
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income/(loss) (a)
 
$
(1,509
)
 
$
(1,509
)
Foreign currency option contracts
Other comprehensive income/(loss) (a)
 
(363
)
 
(363
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency exchange contracts
Other operating (expense) income
 
(456
)
 
1,426

Foreign currency option contracts
Other operating (expense) income
 
(1,491
)
 
(1,491
)
Interest rate swaps
Interest and other miscellaneous income
 
2,650

 
2,650

Fuel hedges
Cost of sales - benefit
 
148

 
148

(a)
See Note 17Accumulated Other Comprehensive Loss.
During the next 12 months, the amount of the June 30, 2013 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 loss of approximately $1.9 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheet at June 30, 2013:
 
June 30, 2013
 
Notional Amount (a)
Derivatives designated as cash flow hedges:
 
Foreign currency exchange contracts
19,000

Foreign currency option contracts
26,000

 
 
Derivatives not designated as hedging instruments:
 
Foreign currency exchange contracts
7,020

Foreign currency option contracts
30,000

Interest rate swaps
172,497

Fuel contracts
40

(a) All notional amounts are stated in dollars except fuel contracts which are denominated in thousands of barrels.

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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 Sheet at June 30, 2013:
 
June 30, 2013
 
Location on Balance Sheet
 
Fair Value Assets (Liabilities) (a)
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts
Other current liabilities
 
(891
)
Foreign currency option contracts
Other current liabilities
 
(363
)
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency exchange contracts
Other current liabilities
 
(174
)
Foreign currency option contracts
Other current liabilities
 
(352
)
Interest rate swaps
Other current liabilities
 
(2,843
)
 
Other non-current liabilities
 
(6,443
)
Fuel contracts
Other assets
 
69

 
 
 
 
Total derivative contracts:
 
 
 
Other assets
 
 
69

Total derivative assets
 
 
$
69

 
 
 
 
Other current liabilities
 
 
(4,623
)
Other non-current liabilities
 
 
(6,443
)
Total derivative liabilities
 
 
$
(11,066
)
(a)
See Note 10Fair Value Measurements for further information on the fair value of our 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.

10.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Accounting Standards Codification established a three-level hierarchy that prioritizes the inputs used to measure fair value 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.

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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 the carrying amount, estimated fair values and categorization under the fair value hierarchy of financial instruments held by the Company at June 30, 2013 and December 31, 2012, using market information and what management believes to be appropriate valuation methodologies under generally accepted accounting principles:
 
June 30, 2013
 
December 31, 2012
Asset (liability)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
Cash and cash equivalents
$
343,581

 
$
343,581

 
$

 
$
280,596

 
$
280,596

 
$

Restricted cash (a)
2,956

 
2,956

 

 
10,559

 
10,559

 

Current maturities of long-term debt
(75,463
)
 

 
(75,463
)
 
(150,000
)
 

 
(150,000
)
Long-term debt
(1,591,834
)
 

 
(1,718,249
)
 
(1,120,052
)
 

 
(1,250,341
)
Interest rate swaps (b)
(9,286
)
 

 
(9,286
)
 

 

 

Foreign currency exchange contracts (b)
(1,065
)
 

 
(1,065
)
 

 

 

Foreign currency option contracts (b)
(716
)
 

 
(716
)
 

 

 

Fuel contracts (b)
69

 

 
69

 

 

 

(a)
Restricted cash is recorded in “Other Assets” and represents the proceeds from LKE sales deposited with a third-party intermediary.
(b)
See Note 9Derivative Financial Instruments and Hedging Activities for information regarding the Balance Sheet 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 cashThe 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 options contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
Fuel contracts The fair value of diesel fuel 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.

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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)

11.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies. As of June 30, 2013, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Liability
Standby letters of credit (a)
 
$
18,205

 
$
15,000

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
7,231

 
1,360

Total financial commitments
 
$
27,690

 
$
16,403

(a)
Approximately $15 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 2013 and 2014 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 $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At June 30, 2013, 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 2013 and 2014 and are expected to be renewed as required.
 
12.
COMMITMENTS
As disclosed in the Company’s Annual Report on Form 10-K, Rayonier leases certain buildings, machinery and equipment under various operating leases. The Company’s commitments have not materially changed since December 31, 2012 except as related to the acquisition of a controlling interest in the New Zealand joint venture. The following table shows the increase in the Company’s commitments, as of June 30, 2013, as a result of the JV acquisition:
 
Forestry Rights (a)
 
Forest
Leases (b)
Remaining 2013
$
884

 
$
541

2014
1,528

 
1,075

2015
1,528

 
1,075

2016
1,528

 
1,075

2017
1,528

 
1,075

Thereafter
39,757

 
53,889

 
$
46,753

 
$
58,730

(a) Forestry rights grant access to the leased land for the purpose of harvesting. The majority of the JV’s forestry rights terminate with the harvest of the land’s existing crop and require the land to be left in the cut condition upon termination.
(b) Forest leases have an average term between 30 and 99 years. Annual rent is indexed to the Consumer Price Index or current market values. A number of these leases require the land to be returned in a fully stocked condition (replanted).
The JV has a number of Crown Forest Licenses (“CFL”) with the New Zealand government. The leases extend indefinitely and may only be terminated upon a 35 year termination notice from the government. If no termination notice is given, the leases renew automatically each year for a one year term. As of June 30, 2013, the JV has three CFL’s under termination notice, with one terminating in 2034 and the remaining two expiring in 2062. The annual license fee is determined based on current market value, with three yearly rent reviews. The total annual license fee on the CFL’s is $2.7 million per year.



17


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

13.
LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
An analysis of the liabilities for dispositions and discontinued operations follows:
 
June 30,
 
December 31,
 
 
2013
 
2012
 
Balance, beginning of period
$
81,695

 
$
90,824

 
Expenditures charged to liabilities
(4,015
)
 
(9,926
)
 
Increase to liabilities
448

 
797

 
Balance, end of period
78,128

 
81,695

 
Less: Current portion
(8,686
)
 
(8,105
)
 
Non-current portion
$
69,442

 
$
73,590

 
The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of June 30, 2013, this amount could range up to $29 million, attributable to several of the applicable sites, and arises from uncertainty over the availability, feasibility and effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies, potential changes in applicable law and regulations, and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
The Company believes established liabilities are sufficient for probable 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.
 
14.
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.

15.
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. Currently, all qualified 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 tables:
 
Pension
Postretirement
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
2,011

 
$
2,102

 
$
249

 
$
227

Interest cost
3,953

 
4,321

 
240

 
242

Expected return on plan assets
(5,966
)
 
(6,369
)
 

 

Amortization of prior service cost
322

 
327

 
6

 
6

Amortization of losses
4,791

 
4,394

 
218

 
156

Net periodic benefit cost
$
5,111

 
$
4,775

 
$
713

 
$
631


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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)

 
Pension
 
Postretirement
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
4,430

 
$
4,042

 
$
498

 
$
437

Interest cost
8,787

 
8,309

 
480

 
465

Expected return on plan assets
(13,390
)
 
(12,248
)
 

 

Amortization of prior service cost
710

 
629

 
13

 
12

Amortization of losses
10,516

 
8,451

 
436

 
299

Net periodic benefit cost
$
11,053

 
$
9,183

 
$
1,427

 
$
1,213

 
 
 
 
 
 
 
 
In 2013, the Company has no mandatory pension contribution requirements, but may make discretionary contributions.

16.
DEBT
The warrants sold in conjunction with the issuance of the 3.75% Senior Exchangeable Notes due 2012 began maturing on January 15, 2013 and continued to mature through March 27, 2013. As of June 30, 2013, all of the 8,313,511 warrants have settled, resulting in the issuance of 2,135,221 Rayonier common shares.
As of March 31, 2013, 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, 2013. 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 during a period of 30 consecutive trading days as of the last day of the quarter. During the three months ended June 30, 2013, the note holders did not elect to exercise the exchange option. Based upon the average stock price for the 30 trading days ended June 30, 2013, these notes again became exchangeable at the option of the holder for the calendar quarter ending September 30, 2013. The entire balance of the notes remained classified as long-term debt at June 30, 2013 due to the ability and intent of the Company to refinance them on a long-term basis.
During the six months ended June 30, 2013, the Company made net repayments of $15 million on its $450 million unsecured revolving credit facility. The Company had $187 million of available borrowings under this facility at June 30, 2013. The Company also borrowed an additional $200 million on the term credit agreement during the second quarter of 2013 for general corporate purposes. Additional draws totaling $140 million remain available on the term credit agreement.
Joint Venture Debt
On April 4, 2013, Rayonier acquired an additional 39 percent interest in its New Zealand JV, bringing its total ownership to 65 percent and as a result, the JV’s debt was consolidated effective on that date. See Note 6Joint Venture Investment for further information.
The JV’s debt consisted of the following at June 30, 2013:
 
June 30, 2013
Senior Secured Facilities Agreement
 
Revolving Credit Facility due 2014 at variable interest rate of 3.61%
$
123,488

Revolving Credit Facility due 2016 at variable interest rate of 3.76%
57,885

Working Capital Facility due 2013 at variable interest rate of 3.94%
463

 
 
Noncontrolling interest shareholder loan at a 0% interest rate
29,571

 
 
Total debt
211,407

Less: Current maturities of long-term debt
(463
)
Long-term debt
$
210,944


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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)

Senior Secured Facilities Agreement
The New Zealand JV is party to a $199 million variable rate Senior Secured Facilities Agreement, comprised of two tranches of revolving credit facilities and a working capital facility. Although the maximum amounts available under the agreement are denominated in New Zealand dollars, advances are also available in U.S. dollars. This agreement is secured by a Security Trust Deed that provides recourse only to the JV’s assets; there is no recourse to Rayonier Inc. or any of its subsidiaries.
Revolving Credit Facilities
As of June 30, 2013 the Senior Secured Facilities Agreement had $123 million outstanding on Tranche A at 3.61 percent due September 2014 and $58 million outstanding on Tranche B at 3.76 percent due September 2016. The interest rates for both tranches are indexed to the 90 day New Zealand bank bill rate and are generally repriced at quarterly intervals. The margin on the index rate fluctuates based on the interest coverage ratio. The JV manages these rates through interest rate swaps, as discussed at Note 9Derivative Financial Instruments and Hedging Activities.
Working Capital Facility
The $18 million Working Capital Facility is available for short-term operating cash flow needs of the New Zealand JV. This facility holds a variable interest rate indexed to the Official Cash Rate set by the Reserve Bank of New Zealand. The margin ranges from 1.17 percent to 1.44 percent based on the interest coverage ratio and the length of time each borrowing is outstanding. At June 30, 2013, $0.5 million is outstanding at 3.94 percent and due September 2013.
Shareholder Loan
The shareholder loan is an interest-free loan from the noncontrolling JV interest in the amount of $30 million. This loan represents part of the noncontrolling party’s investment in the JV. The loan is secured by timberlands owned by the JV and is subordinated to the Senior Secured Facilities Agreement. Although Rayonier Inc. is not liable for this loan, the shareholder loan instrument contains features with characteristics of both debt and equity and is therefore required to be classified as debt and consolidated. As the loan is effectively at call, the carrying amount is deemed to be the fair value. The entire balance of the shareholder loan remained classified as long-term debt at June 30, 2013 due to the ability and intent of the JV to refinance it on a long-term basis.
Debt Covenants
In connection with the New Zealand JV’s Senior Secured Facilities Agreement, covenants must be met, including generation of sufficient cash flows to meet a minimum interest coverage ratio of 1.50 to 1 on a quarterly basis and maintenance of a leverage ratio of bank debt versus the forest and land valuation below the covenant's maximum ratio of 35 percent. At June 30, 2013, the New Zealand JV was in compliance with all its covenants.
There were no other significant changes to the Company’s outstanding debt as reported in Note 11 — Debt in the Company’s 2012 Annual Report on Form 10-K.
Subsequent Event
On July 5, 2013 the New Zealand JV negotiated amendments to the existing Senior Secured Facilities Agreement. The amended and restated Senior Secured Facilities Agreement is now comprised of two tranches; a $181 million revolving cash advance facility (“Tranche A”) expiring September 2016 and an $18 million working capital facility (“Tranche B”) expiring July 2014. In addition to the extended maturity dates, the amended and restated agreement provides for favorable changes to the interest rate margin and covenant requirements. The margin for revolving cash advance borrowings now ranges from 0.75 percent to 0.85 percent (previously 0.775 percent to 1.05 percent). There was no change to the working capital facility interest rate. The maximum leverage ratio was increased to 40 percent and the interest coverage ratio was amended to allow a minimum ratio of 1.25 to 1, provided that the ratio is not below 1.50 to 1 for any two consecutive quarters.

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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)

17.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated Other Comprehensive Loss was comprised of the following:
 
Foreign currency translation gains
 
New Zealand joint venture cash flow hedges
 
Unrecognized components of employee benefit plans, net of tax
 
Total
Balance as of December 31, 2012
$
38,829

 
$
(3,628
)
 
$
(144,580
)
 
$
(109,379
)
Other comprehensive income before reclassifications
(17,650
)
(a)
(728
)
 
530

 
(17,848
)
Amounts reclassified from accumulated other comprehensive income

 
2,159

 
8,157

(b)
10,316

Net other comprehensive income
(17,650
)
 
1,431


8,687


(7,532
)
Balance as of June 30, 2013
$
21,179

 
$
(2,197
)
 
$
(135,893
)
 
$
(116,911
)
(a)
The loss is due to a six cent decrease in the New Zealand dollar exchange rate.
(b)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 15Employee Benefit Plans for additional information.

The following table presents details of the amounts reclassified in their entirety from AOCI for the six-month period ended June 30, 2012:
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other comprehensive income
 
Affected line item in the statement where net income is presented
New Zealand joint venture cash flow hedges
 
$
2,159

 
Gain related to consolidation of New Zealand joint venture

18.
OTHER OPERATING (EXPENSE) INCOME, NET
Other operating (expense) income, net was comprised of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Lease income, primarily from hunting leases
$
2,313

 
$
2,520

 
$
4,774

 
$
4,905

Other non-timber income
604

 
1,048

 
1,078

 
1,891

Foreign currency gain (loss)
979

 
680

 
795

 
(185
)
Loss on sale or disposal of property, plant & equipment
(269
)
 
(711
)
 
(698
)
 
(1,732
)
Insurance recoveries

 
2,319

 

 
2,319

Loss on foreign currency contracts
(1,947
)
 

 
(65
)
 

Legal and corporate development costs
(1,971
)
 
(561
)
 
(2,672
)
 
(765
)
Total
$
(291
)
 
$
5,295

 
$
3,212

 
$
6,433





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

19.
CONSOLIDATING FINANCIAL STATEMENTS
The condensed 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 August 2009 TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015. The notes are guaranteed by Rayonier Inc. as the Parent Guarantor and Rayonier Operating Company LLC (“ROC”) as the Subsidiary Guarantor. In connection with these exchangeable notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
 
 
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 AND COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2013
 
Rayonier Inc.
(Parent
Guarantor)
 
ROC (Subsidiary Guarantor)
 
Rayonier TRS
Holdings Inc.
(Issuer)
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES