Rayonier 2013 10Q 3Q2013
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 23, 2013, there were outstanding 126,255,949 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
 
2.
 
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 September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
SALES
$
384,784

 
$
386,163

 
$
1,187,580

 
$
1,070,830

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
287,150

 
259,201

 
850,866

 
738,480

Selling and general expenses
15,326

 
15,476

 
48,354

 
50,633

Other operating (income) expense, net
(1,341
)
 
306

 
(4,553
)
 
(6,128
)
 
301,135

 
274,983

 
894,667

 
782,985

Equity in income of New Zealand joint venture

 
66

 
562

 
249

OPERATING INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
83,649

 
111,246

 
293,475

 
288,094

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

 

 
16,098

 

OPERATING INCOME
83,649

 
111,246

 
309,573

 
288,094

Interest expense
(13,031
)
 
(8,253
)
 
(30,768
)
 
(36,133
)
Interest and miscellaneous (expense) income, net
(746
)
 
234

 
1,911

 
294

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
69,872

 
103,227

 
280,716

 
252,255

Income tax expense
(11,505
)
 
(23,949
)
 
(31,200
)
 
(54,287
)
INCOME FROM CONTINUING OPERATIONS
58,367

 
79,278

 
249,516

 
197,968

DISCONTINUED OPERATIONS, NET (Note 2)
 
 
 
 
 
 
 
Income from discontinued operations, net of income tax expense of $0, $646, $22,273 and $2,573

 
1,282

 
44,477

 
5,108

NET INCOME
58,367

 
80,560

 
293,993

 
203,076

Less: Net income attributable to noncontrolling interest
1,022

 

 
1,749

 

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
57,345

 
80,560

 
292,244

 
203,076

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Foreign currency translation adjustment
24,259

 
5,373

 
(2,967
)
 
3,115

New Zealand joint venture cash flow hedges
3,433

 
878

 
4,209

 
86

Amortization of pension and postretirement plans, net of income tax expense of $1,579, $1,482, $5,403 and $4,332
3,639

 
3,401

 
12,326

 
9,943

Total other comprehensive income
31,331

 
9,652

 
13,568

 
13,144

COMPREHENSIVE INCOME
89,698

 
90,212

 
307,561

 
216,220

Less: Comprehensive income (loss) attributable to noncontrolling interest
8,594

 

 
(909
)
 

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
81,104

 
$
90,212

 
$
308,470

 
$
216,220

EARNINGS PER COMMON SHARE (Note 3)
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.45

 
$
0.65

 
$
1.97

 
$
1.62

Discontinued Operations

 
0.01

 
0.36

 
0.04

Net Income
$
0.45

 
$
0.66

 
$
2.33

 
$
1.66

DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.44

 
$
0.61

 
$
1.89

 
$
1.54

Discontinued Operations

 
0.01

 
0.34

 
0.04

Net Income
$
0.44

 
$
0.62

 
$
2.23

 
$
1.58


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
September 30, 2013
 
December 31, 2012
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
260,738

 
$
280,596

Accounts receivable, less allowance for doubtful accounts of $595 and $417
124,360

 
100,359

Inventory
 
 
 
Finished goods
115,635

 
103,568

Work in progress
3,304

 
4,446

Raw materials
12,823

 
17,602

Manufacturing and maintenance supplies
2,223

 
2,350

Total inventory
133,985

 
127,966

Deferred tax assets
62,914

 
15,845

Prepaid and other current assets
59,184

 
41,508

Total current assets
641,181

 
566,274

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,103,503

 
1,573,309

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
23,168

 
27,383

Buildings
184,933

 
147,445

Machinery and equipment
1,761,590

 
1,444,012

Construction in progress
17,157

 
268,459

Total property, plant and equipment, gross
1,986,848

 
1,887,299

Less — accumulated depreciation
(1,118,416
)
 
(1,180,261
)
      Total property, plant and equipment, net
868,432

 
707,038

INVESTMENT IN JOINT VENTURE (Note 6)

 
72,419

OTHER ASSETS
205,004

 
203,911

TOTAL ASSETS
$
3,818,120

 
$
3,122,951

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable
$
98,970

 
$
70,381

Current maturities of long-term debt
10,000

 
150,000

Accrued taxes
20,146

 
13,824

Accrued payroll and benefits
26,484

 
28,068

Accrued interest
13,854

 
7,956

Accrued customer incentives
10,771

 
10,849

Other current liabilities
51,191

 
18,640

Current liabilities for dispositions and discontinued operations (Note 13)
8,446

 
8,105

Total current liabilities
239,862

 
307,823

LONG-TERM DEBT
1,646,337

 
1,120,052

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 13)
67,125

 
73,590

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 15)
158,663

 
159,582

OTHER NON-CURRENT LIABILITIES
21,254

 
23,900

COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 14)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 126,224,421 and 123,332,444 shares issued and outstanding
687,357

 
670,749

Retained earnings
995,249

 
876,634

Accumulated other comprehensive loss
(93,153
)
 
(109,379
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,589,453

 
1,438,004

Noncontrolling interest
95,426

 

TOTAL SHAREHOLDERS’ EQUITY
1,684,879

 
1,438,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
3,818,120

 
$
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)
 
Nine Months Ended September 30,
 
2013
 
2012
OPERATING ACTIVITIES
 
 
 
Net income
$
293,993

 
$
203,076

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
132,810

 
100,130

Non-cash cost of real estate sold
4,349

 
3,005

Stock-based incentive compensation expense
8,993

 
12,212

Amortization of debt discount/premium
887

 
5,367

Deferred income taxes
42,832

 
(6,028
)
Tax benefit of AFMC for CBPC exchange
(18,761
)
 
(11,660
)
Non-cash adjustments to unrecognized tax benefit liability
3,966

 

Amortization of losses from pension and postretirement plans
16,835

 
14,275

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

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

Loss on early redemption of exchangeable notes
3,017

 

Other
(8,538
)
 
(332
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(18,710
)
 
(14,169
)
Inventories
(9,040
)
 
(646
)
Accounts payable
13,712

 
(13,326
)
Income tax receivable/payable
(2,482
)
 
52,189

All other operating activities
5,863

 
16,416

Payment to exchange AFMC for CBPC
(70,311
)
 

Expenditures for dispositions and discontinued operations
(6,411
)
 
(6,867
)
CASH PROVIDED BY OPERATING ACTIVITIES
334,236

 
353,642

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(122,482
)
 
(112,015
)
Purchase of additional interest in New Zealand joint venture
(139,879
)
 

Purchase of timberlands
(11,650
)
 
(11,632
)
Jesup mill cellulose specialties expansion (gross purchases of $140,820 and $130,718, net of purchases on account of $3,428 and $25,936)
(137,392
)
 
(104,782
)
Proceeds from disposition of Wood Products business, net of income tax payments of $16,027
68,063

 

Change in restricted cash
3,989

 
(12,796
)
Other
159

 
4,281

CASH USED FOR INVESTING ACTIVITIES
(339,192
)
 
(236,944
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
607,885

 
355,000

Repayment of debt
(453,463
)
 
(198,653
)
Dividends paid
(175,079
)
 
(152,358
)
Proceeds from the issuance of common shares
9,205

 
20,732

Excess tax benefits on stock-based compensation
8,189

 
7,057

Debt issuance costs

 
(3,698
)
Repurchase of common shares
(11,303
)
 
(7,783
)
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(14,566
)
 
20,297

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(336
)
 
(123
)
CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
(19,858
)
 
136,872

Balance, beginning of year
280,596

 
78,603

Balance, end of period
$
260,738

 
$
215,475

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period:
 
 
 
Interest
$
26,930

 
$
18,239

Income taxes
$
88,024

 
$
14,912

Non-cash investing activity:
 
 
 
Capital assets purchased on account
$
29,738

 
$
52,727

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
)
 
$

Partial conversion of Senior Exchangeable Notes to equity
$
1,497

 
$


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 one subsequent event was identified that warranted disclosure. See Note 16 — Debt for additional information.


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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 nine months ended September 30, 2013.

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

 
$
22,825

 
$
16,968

 
$
65,865

Cost of sales and other

 
(20,897
)
 
(14,258
)
 
(58,184
)
Gain on sale of discontinued operations

 

 
64,040

 

Income from discontinued operations before income taxes

 
1,928

 
66,750

 
7,681

Income tax expense

 
(646
)
 
(22,273
)
 
(2,573
)
Income from discontinued operations, net
$

 
$
1,282

 
$
44,477

 
$
5,108


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 September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Wood chip purchases
$

 
$
3,270

 
$
1,650

 
$
9,507

Saw timber procurement services

 
282

 
223

 
856

Total intercompany
$

 
$
3,552

 
$
1,873

 
$
10,363


3.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Income from continuing operations
$
58,367

 
$
79,278

 
$
249,516

 
$
197,968

Less: Income from continuing operations attributable to noncontrolling interest
1,022

 

 
1,749

 

Income from continuing operations attributable to Rayonier Inc.
$
57,345

 
$
79,278

 
$
247,767

 
$
197,968

 
 
 
 
 
 
 
 
Income from discontinued operations attributable to Rayonier Inc.
$

 
$
1,282

 
$
44,477

 
$
5,108

 
 
 
 
 
 
 
 
Net income attributable to Rayonier Inc.
$
57,345

 
$
80,560

 
$
292,244

 
$
203,076

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per common share
126,122,151

 
122,848,705

 
125,549,133

 
122,552,910

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
468,286

 
603,761

 
501,324

 
667,960

Performance and restricted shares
546,247

 
755,884

 
518,138

 
735,653

Assumed conversion of Senior Exchangeable Notes (a)
2,168,254

 
3,683,936

 
2,176,414

 
3,148,423

Assumed conversion of warrants (a) (b)
1,608,466

 
2,067,380

 
2,043,965

 
1,443,606

Shares used for determining diluted earnings per common share
130,913,404

 
129,959,666

 
130,788,974

 
128,548,552

Basic earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.65

 
$
1.97

 
$
1.62

Discontinued operations

 
0.01

 
0.36

 
0.04

Net income
$
0.45

 
$
0.66

 
$
2.33

 
$
1.66

Diluted earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.44

 
$
0.61

 
$
1.89

 
$
1.54

Discontinued operations

 
0.01

 
0.34

 
0.04

Net income
$
0.44

 
$
0.62

 
$
2.23

 
$
1.58


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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
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
 
 
 
 
Stock options, performance and restricted shares
101,884

 
123,217

 
167,487

 
261,759

Assumed conversion of exchangeable note hedges (a)
2,168,254

 
3,683,936

 
2,176,414

 
3,148,423

Total
2,270,138

 
3,807,153

 
2,343,901

 
3,410,182

(a) The Senior Exchangeable Notes due 2012 (the “2012 Notes”) matured in October 2012 and $31.5 million of the Senior Exchangeable Notes due 2015 (the “2015 Notes”) were redeemed by the noteholders in September 2013; however, no additional shares were issued due to offsetting exchangeable note hedges. Similarly, Rayonier will not issue additional shares upon future exchange or maturity of 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 included for the three and nine months ended September 30, 2012. The full dilutive effect of the 2015 Notes was included for the three and nine months ended September 30, 2012, while only a proportional amount based on the length of time the $31.5 million balance was outstanding before the exchange was included for the three and nine months ended September 30, 2013.
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 associated with the 2015 Notes if the stock price exceeds $39.24 per share. For further information, 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 associated with the 2012 Notes in the first nine months of 2013 were primarily due to an increase in the average stock price from $45.65 in the nine months ended September 30, 2012 to $56.42, partially offset by a decrease in dilutive shares due to the maturity of the warrants. The shares used for the assumed conversion of the warrants decreased in the third quarter of 2013 as there was no dilutive impact from the warrants on the 2012 Notes.

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. 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 original 2009 tax return.
In the first quarter of 2013 management approved the exchange of approximately 120 million gallons of black liquor for the CBPC previously claimed for the AFMC, resulting in a $18.8 million tax benefit. In the third quarter 2012, management approved the exchange of approximately 22 million gallons, bringing the total number of exchange gallons approved year-to date to 82 million for 2012. The impact of the exchanges in 2012 was $2.6 million and $11.7 million for the quarter and year-to-date periods, respectively. Third quarter 2012 results also reflect the reversal of a $3.4 million interest expense accrual based on IRS guidance stating interest payments are not required for AFMC exchanged for the CBPC, based upon the manner of the Company's original claim. For additional information on the AFMC and CBPC, see Note 8 — Income Taxes in the Company’s 2012 Annual Report.

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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)

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 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 September 30,
 
2013
 
2012
Income tax expense at federal statutory rate
$
24

 
35.0
 %
 
$
36

 
35.0
 %
REIT income not subject to tax
(11
)
 
(15.7
)
 
(6
)
 
(5.9
)
Other
1

 
0.5

 
(2
)
 
(2.3
)
Income tax expense before discrete items
14

 
19.8
 %
 
28

 
26.8
 %
Exchange of AFMC for CBPC

 

 
(3
)
 
(3.1
)
Other
(2
)
 
(3.3
)
 
(1
)
 
(0.5
)
Income tax expense as reported
$
12

 
16.5
 %
 
$
24

 
23.2
 %

 
Nine Months Ended September 30,
 
2013
 
2012
Income tax expense at federal statutory rate
$
98

 
35.0
 %
 
$
88

 
35.0
 %
REIT income not subject to tax
(37
)
 
(13.2
)
 
(18
)
 
(7.2
)
Other
(1
)
 
(0.5
)
 
(3
)
 
(1.3
)
Income tax expense before discrete items
60

 
21.3
 %
 
67

 
26.5
 %
Exchange of AFMC for CBPC
(19
)
 
(6.7
)
 
(12
)
 
(4.6
)
Gain related to consolidation of New Zealand joint venture
(5
)
 
(2.0
)
 

 

Other
(5
)
 
(1.5
)
 
(1
)
 
(0.4
)
Income tax expense as reported
$
31

 
11.1
 %
 
$
54

 
21.5
 %
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 nine months ended September 30, 2013 and 2012, income tax expense related to discontinued operations was $22.3 million ($21.4 million from the gain on sale) and $2.6 million, respectively. For the three months ended September 30, 2012, income tax related to discontinued operations was $0.6 million. See Note 2Sale of Wood Products Business for additional information.
Unrecognized Tax Benefits
In accordance with generally accepted accounting principles, the Company recognizes the impact of a tax position if a position is “more likely than not” to prevail. During third quarter 2013, the Company filed an amended 2009 federal income tax return reflecting an increased domestic production deduction due to the inclusion of the CBPC income. As required, the Company recorded a $4.8 million liability related to this uncertain tax position.

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 September 30, 2013 and December 31, 2012, the Company had $6.6 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.


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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)

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 (“New Zealand 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 New Zealand 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 September 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 New Zealand JV forests and operates a log trading business.
The purchase price of the additional interest in the New Zealand 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 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 additional consideration to the New Zealand 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. In the second quarter of 2013, the contingent consideration was 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 New Zealand JV as an equity method investment. The additional 39 percent interest acquired resulted in the Company obtaining a controlling financial interest in the New Zealand 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 New Zealand 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.

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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 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 New Zealand JV. Subsequent to the acquisition date, $96.0 million of the noncontrolling interest’s shareholder loans were converted to preferred equity.
The Company’s operating results for the nine months ended September 30, 2013 reflect 26 percent of the New Zealand 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 New Zealand JV included in the Company’s Consolidated Statements of Income and Comprehensive Income from the acquisition date to the period ended September 30, 2013 are as follows:
 
Revenue and earnings from
 April 4, 2013 to September 30, 2013
Sales
$
98,717

Net Income
4,997

The following represents the pro forma consolidated sales and net income for the 2013 and 2012 third quarter and year-to-date periods as if the additional interest in the New Zealand JV had been acquired on January 1, 2012.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Sales
$
384,784

 
$
437,881

 
$
1,222,106

 
$
1,216,691

Net Income
$
58,367

 
$
78,598

 
$
292,234

 
$
197,330



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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)

7.
SHAREHOLDERS’ EQUITY
 An analysis of shareholders’ equity for the nine months ended September 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

 

 

 

 
96,335

 
96,335

Net income

 

 
292,244

 

 
1,749

 
293,993

Dividends ($1.37 per share)

 

 
(173,629
)
 

 

 
(173,629
)
Issuance of shares under incentive stock plans
967,566

 
9,205

 

 

 

 
9,205

Stock-based compensation

 
9,020

 

 

 

 
9,020

Excess tax benefit on stock-based compensation

 
8,189

 

 

 

 
8,189

Repurchase of common shares
(210,810
)
 
(11,303
)
 

 

 

 
(11,303
)
Equity portion of convertible debt (Note 16)

 
1,497

 

 

 

 
1,497

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

 

 

 

 

 

Amortization of pension and postretirement plans

 

 

 
12,326

 

 
12,326

Foreign currency translation adjustment

 

 

 
237

 
(3,204
)
 
(2,967
)
Joint venture cash flow hedges

 

 

 
3,663

 
546

 
4,209

Balance, September 30, 2013
126,224,421

 
$
687,357

 
$
995,249

 
$
(93,153
)
 
$
95,426

 
$
1,684,879

 

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 New Zealand JV, bringing its total ownership to 65 percent. As a result, 100 percent of the New Zealand 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 New Zealand JV’s assets and liabilities are fully consolidated at September 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.

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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 Performance Fibers segment included two major product lines, cellulose specialties and absorbent materials. Beginning in the third quarter of 2013 and in conjunction with the completion of the cellulose specialties expansion (“CSE”) project, the Company’s Jesup mill discontinued producing absorbent material and began producing commodity viscose during the multi-year transition to higher cellulose specialties volume. Commodity viscose is a dissolving wood pulp used primarily in the manufacture of textiles. Commodity Viscose/Other includes commodity viscose and off-grade.
The Company’s remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are reported in “Other Operations.” Sales between operating segments are made based on 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:
 
September 30,
 
December 31,
ASSETS
2013
 
2012
Forest Resources
$
2,216,727

 
$
1,690,030

Real Estate
88,002

 
112,647

Performance Fibers
1,122,779

 
902,309

Wood Products (a)

 
18,454

Other Operations
29,056

 
23,296

Corporate and other
361,556

 
376,215

Total
$
3,818,120

 
$
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 September 30,
 
Nine Months Ended September 30,
SALES
2013
 
2012
 
2013
 
2012
Forest Resources
$
111,260

 
$
59,853

 
$
277,422

 
$
164,711

Real Estate
14,088

 
13,043

 
51,761

 
37,369

Performance Fibers
224,243

 
288,221

 
761,456

 
793,586

Other Operations
35,295

 
26,293

 
97,394

 
76,702

Intersegment Eliminations
(102
)
 
(1,247
)
 
(453
)
 
(1,538
)
Total
$
384,784

 
$
386,163

 
$
1,187,580

 
$
1,070,830



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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 September 30,
 
Nine Months Ended September 30,
OPERATING INCOME(LOSS)
2013
 
2012
 
2013
 
2012
Forest Resources
$
23,172

 
$
11,184

 
$
57,317

 
$
27,438

Real Estate
7,521

 
8,420

 
30,468

 
20,897

Performance Fibers
62,663

 
101,455

 
233,415

 
265,812

Other Operations
(301
)
 
(419
)
 
1,643

 
(201
)
Corporate and other (c)
(9,406
)
 
(9,394
)
 
(13,270
)
 
(25,852
)
Total
$
83,649

 
$
111,246

 
$
309,573

 
$
288,094

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2013
 
2012
 
2013
 
2012
Forest Resources
$
28,475

 
$
18,793

 
$
72,210

 
$
52,662

Real Estate
2,074

 
1,288

 
8,720

 
4,733

Performance Fibers
22,340

 
15,077

 
51,142

 
41,577

Corporate and other
262

 
368

 
738

 
1,158

Total
$
53,151

 
$
35,526

 
$
132,810

 
$
100,130


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 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. 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 New Zealand 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 New Zealand 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 September 30, 2013, the Company’s interest rate contracts had maturity dates through January 2020.

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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)

Fuel Hedge Contracts
The Company uses fuel swap contracts to manage its New Zealand 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 September 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.
The following table demonstrates the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the third quarter and nine months ended September 30, 2013:
 
 
 
September 30, 2013
 
Income Statement Location
 
Three Months Ended
 
Nine Months Ended
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income (loss)
 
$
2,602

 
$
1,093

 
Other operating income (expense)
 
(619
)
 
(619
)
Foreign currency option contracts
Other comprehensive income (loss)
 
832

 
468

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
Foreign currency exchange contracts
Other operating income (expense)
 
360

 
1,786

Foreign currency option contracts
Other operating income (expense)
 
480

 
(1,011
)
Interest rate swaps
Interest and other miscellaneous income
 
2,079

 
4,729

Fuel hedges
Cost of sales - benefit
 
(162
)
 
(14
)
During the next 12 months, the amount of the September 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 $1.5 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets at September 30, 2013:
 
September 30, 2013
 
Notional Amount (a)
Derivatives designated as cash flow hedges:
 
Foreign currency exchange contracts
$
23,500

Foreign currency option contracts
32,000

 
 
Derivatives not designated as hedging instruments:
 
Foreign currency exchange contracts
$
8,650

Foreign currency option contracts
16,000

Interest rate swaps
185,013

Fuel contracts
41

(a) All notional amounts are stated in thousands of 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 September 30, 2013:
 
September 30, 2013
 
Location on Balance Sheet
 
Fair Value Assets (Liabilities) (a)
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts
Other current liabilities
 
(9
)
 
Other assets
 
1,101

Foreign currency option contracts
Other current liabilities
 
(286
)
 
Other assets
 
755

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Foreign currency exchange contracts
Prepaid and other current assets
 
204

Foreign currency option contracts
Other current liabilities
 
(56
)
 
Other assets
 
200

Interest rate swaps
Other current liabilities
 
(2,949
)
 
Other non-current liabilities
 
(4,164
)
Fuel contracts
Other current liabilities
 
(109
)
 
 
 
 
Total derivative contracts:
 
 
 
Prepaid and other current assets
 
 
204

Other assets
 
 
2,056

Total derivative assets
 
 
$
2,260

 
 
 
 
Other current liabilities
 
 
(3,409
)
Other non-current liabilities
 
 
(4,164
)
Total derivative liabilities
 
 
$
(7,573
)
(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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Table of Contents
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 September 30, 2013 and December 31, 2012, using market information and what management believes to be appropriate valuation methodologies under generally accepted accounting principles:
 
September 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
$
260,738

 
$
260,738

 
$

 
$
280,596

 
$
280,596

 
$

Restricted cash (a)
6,569

 
6,569

 

 
10,559

 
10,559

 

Current maturities of long-term debt
(10,000
)
 

 
(16,900
)
(b)
(150,000
)
 

 
(150,000
)
Long-term debt
(1,646,337
)
 

 
(1,739,813
)
 
(1,120,052
)
 

 
(1,250,341
)
Interest rate swaps (c)
(7,113
)
 

 
(7,113
)
 

 

 

Foreign currency exchange contracts (c)
1,296

 

 
1,296

 

 

 

Foreign currency option contracts (c)
613

 

 
613

 

 

 

Fuel contracts (c)
(109
)
 

 
(109
)
 

 

 

(a)
Restricted cash is recorded in “Other Assets” and represents the proceeds from LKE sales deposited with a third-party intermediary.
(b)
The fair market value of current maturities of long-term-term debt represents the value of the debt and equity associated with the early redemption of a portion of the Senior Exchangeable Notes due 2015. The Company has a hedge agreement that offsets the $6.9 million equity portion of the current maturity. See Note 16Debt for more information regarding the exchange of the notes.
(c)
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 option 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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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 September 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)
 
7,328

 
1,151

Total financial commitments
 
$
27,787

 
$
16,194

(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 September 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 during 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. Rayonier’s commitments have changed primarily due to the acquisition of a controlling interest in the New Zealand JV and sale of the Wood Products business. The following table shows the increase in the Company’s commitments, as of September 30, 2013:
 
Forestry Rights (a)
 
Forest
Leases (b)
 
Operating Leases (c)
 
Purchase Obligations (d)
Remaining 2013
$
474

 
$
290

 
$
315

 
2,088

2014
1,639

 
1,153

 
883

 
8,645

2015
1,639

 
1,153

 
612

 
8,345

2016
1,639

 
1,153

 
1,632

 
9,577

2017
1,639

 
1,153

 
2,410

 
8,597

Thereafter
42,642

 
57,799

 
17,789

 
6,005

 
$
49,672

 
$
62,701

 
$
23,641

 
$
43,257

(a) Forestry rights grant access to the leased land for the purpose of harvesting. The majority of the New Zealand 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).
(c) Operating leases include New Zealand leases on buildings, machinery and equipment under various operating leases and a Jesup mill natural gas transportation lease.
(d)
Pursuant to the Wood Products purchase and sale agreement, Rayonier contracted with Interfor to purchase wood chips produced at the lumber mills for use at Rayonier’s Jesup mill. Purchase obligations include obligations under this agreement as well as payments expected to be made on derivative financial instruments held in New Zealand.
The New Zealand JV has a number of Crown Forest Licenses (“CFL”) with the New Zealand government, which are excluded from the table above. 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 September 30, 2013, the New Zealand 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.

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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:
 
September 30,
 
December 31,
 
 
2013
 
2012
 
Balance, beginning of period
$
81,695

 
$
90,824

 
Expenditures charged to liabilities
(6,411
)
 
(9,926
)
 
Increase to liabilities
287

 
797

 
Balance, end of period
75,571

 
81,695

 
Less: Current portion
(8,446
)
 
(8,105
)
 
Non-current portion
$
67,125

 
$
73,590

 
The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of September 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 recorded are shown in the following tables:
 
Pension
Postretirement
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
2,011

 
$
2,102

 
$
330

 
$
227

Interest cost
3,953

 
4,321

 
231

 
242

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

 

Amortization of prior service cost
322

 
327

 
6

 
6

Amortization of losses
4,792

 
4,394

 
98

 
156

Net periodic benefit cost
$
5,112

 
$
4,775

 
$
665

 
$
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
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
$
6,441

 
$
6,143

 
$
828

 
$
664

Interest cost
12,740

 
12,630

 
711

 
706

Expected return on plan assets
(19,356
)
 
(18,618
)
 

 

Amortization of prior service cost
1,032

 
956

 
19

 
18

Amortization of losses
15,308

 
12,846

 
533

 
455

Net periodic benefit cost
$
16,165

 
$
13,957

 
$
2,091

 
$
1,843

 
 
 
 
 
 
 
 
In 2013, the Company has no mandatory pension contribution requirements and does not expect to make any 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. In first and second quarter 2013, 8,313,511 of warrants were settled, resulting in the issuance of 2,135,221 Rayonier common shares.
As of June 30, 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 September 30, 2013. According to 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 September 30, 2013, three groups of note holders elected to exercise their right to redeem $41.5 million of the notes. As of September 30, 2013, two redemptions in the amount of $31.5 million have settled. The third redemption of $10 million was settled on October 3, 2013 and classified as short-term debt at September 30, 2013. In accordance with Accounting Standards Codification (“ASC”) 470-50, Modifications and Extinguishments [Debt], the fair value of the debt prior to redemption was compared to its carrying amount and the difference expensed, along with unamortized discount and issuance costs. As a result, Rayonier recorded a loss on debt extinguishment of $3 million in the third quarter.
Based upon the average stock price for the 30 trading days ended September 30, 2013, these notes again became exchangeable at the option of the holder for the calendar quarter ending December 31, 2013. The remaining balance of the notes is classified as long-term debt at September 30, 2013 due to the ability and intent of the Company to refinance them on a long-term basis.
During the nine months ended September 30, 2013, the Company had no net activity on its $450 million unsecured revolving credit facility. The Company had $172 million of available borrowings under this facility at September 30, 2013, net of $3 million to secure its outstanding letters of credit. During the nine months ended September 30, 2013, the Company borrowed an additional $200 million on the term credit agreement 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 New Zealand JV’s debt was consolidated effective on that date. See Note 6Joint Venture Investment for further information.

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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 New Zealand JV’s debt consisted of the following at September 30, 2013:
 
September 30, 2013
Senior Secured Facilities Agreement
 
Revolving Credit Facility due 2016 at variable interest rate of 4.39%
$
194,533

Working Capital Facility due 2014

 
 
Noncontrolling interest shareholder loan at a 0% interest rate
31,717

 
 
Total debt
226,250

Less: Current maturities of long-term debt

Long-term debt
$
226,250

Senior Secured Facilities Agreement
The New Zealand JV is party to a $214 million variable rate Senior Secured Facilities Agreement comprised of two tranches. Tranche A, a $195 million revolving cash advance facility expires September 2016 and Tranche B, a $19 million working capital facility expires July 2014. Although the maximum amounts available under the agreement are denominated in New Zealand dollars, advances on Tranche A are also available in U.S. dollars. This agreement is secured by a Security Trust Deed that provides recourse only to the New Zealand JV’s assets; there is no recourse to Rayonier Inc. or any of its subsidiaries.
Revolving Credit Facility
As of September 30, 2013 the Senior Secured Facilities Agreement had $195 million outstanding on Tranche A at 4.39 percent due September 2016. The interest rate is indexed to the 90 day New Zealand Bank bill rate and is generally repriced quarterly. The margin on the index rate fluctuates based on the interest coverage ratio. The New Zealand JV manages these rates through interest rate swaps, as discussed at Note 9Derivative Financial Instruments and Hedging Activities.
Working Capital Facility
The $19 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 September 30, 2013, there was no outstanding balance on the Working Capital Facility.
Shareholder Loan
The shareholder loan is an interest-free loan from the noncontrolling New Zealand JV interest in the amount of $32 million. This loan represents part of the noncontrolling party’s investment in the New Zealand JV. The loan is secured by timberlands owned by the New Zealand 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 September 30, 2013 due to the ability and intent of the Company 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 1.25 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 40 percent. At September 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.

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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)

Subsequent Event
On October 3, 2013, the third settlement of Senior Exchangeable Notes due 2015 in the amount of $10 million was completed. As a result, Rayonier recorded a $1 million loss on the redemption in the fourth quarter.

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
237

 
809

 
530

 
1,576

Amounts reclassified from accumulated other comprehensive income

 
2,854

 
11,796

(a)
14,650

Net other comprehensive income
237

 
3,663


12,326


16,226

Balance as of September 30, 2013
$
39,066

 
$
35

 
$
(132,254
)
 
$
(93,153
)
(a)
This accumulated other comprehensive income component is 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 nine months ended September 30, 2013:
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other comprehensive income
 
Affected line item in the income statement
Loss from New Zealand joint venture cash flow hedges
 
$
2,159

 
Gain related to consolidation of New Zealand joint venture
Realized loss on foreign exchange contracts
 
1,069

 
Other operating (income) expense, net
Noncontrolling interest benefit
 
(374
)
 
Comprehensive income (loss) attributable to noncontrolling interest