Rayonier 2014/A 10Q 2Q2014/A
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q/A
(AMENDMENT NO. 1)
(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, 2014
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
225 WATER STREET, SUITE 1400
JACKSONVILLE, FL 32202
(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 November 3, 2014, there were outstanding 126,726,146 Common Shares of the registrant.


















Table of Contents


EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) to the Quarterly Report on Form 10-Q of Rayonier Inc. (the “Company”) for the quarterly period ended June 30, 2014 is being filed to amend and restate in their entirety the following items of its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014 that was filed on August 8, 2014 (the “Original Filing”): (i) Item 1 of Part I, “Financial Information,” (ii) Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and (iii) Item 4 of Part I, “Controls and Procedures.” The Company has also updated the signature page, the certifications of its chief executive officer and chief financial officer in Exhibits 31.1, 31.2 and 32 and its unaudited consolidated financial statements formatted in Extensible Business Reporting Language (XBRL) in Exhibit 101. Concurrently with the filing of this Amendment, the Company is also filing Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013, Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 and Amendment No. 1 to its Form 8-K filed with the Securities and Exchange Commission on July 3, 2014.

On June 27, 2014, the Company spun off its Performance Fibers business to its shareholders as a newly formed publicly traded company named Rayonier Advanced Materials Inc. Following the spin-off, new management conducted a review of the Company’s operations and business strategies and identified issues related to its historical timber harvest levels, its estimate of merchantable timber inventory and the effect of such estimate on its calculation of depletion expense in each of the quarterly periods ended March 31, 2014 and June 30, 2014. At the direction of the Company’s Board of Directors, management commenced an internal review into these matters with the assistance of independent counsel, forensic accountants and financial advisers. As a result of the internal review, the Company concluded that it included in merchantable timber inventory for 2014, timber in specially designated parcels located in restricted, environmentally sensitive or economically inaccessible areas, which was incorrect, inconsistent with its definition of merchantable inventory, and a significant change from prior years. As a result, the Company concluded that it understated its depletion expense in cost of goods sold (referred to as “Cost of sales” in the Company's consolidated statements of income) by approximately $2.0 million in each of the quarterly periods ended March 31, 2014 and June 30, 2014, which resulted in a corresponding overstatement of income from continuing operations of $1.9 million and $2.0 million, respectively, in those periods. In addition, management determined that there was a material weakness in the Company’s internal controls related to merchantable timber inventory, as discussed in Part I, Item 4 of this Amendment. Accordingly, the Company has filed this Amendment and the restated interim consolidated financial statements contained herein. Further details of the errors and the impact on the unaudited financial statements set forth in the Original Filing are contained in Note 3 — Restatement of Previously Issued Consolidated Financial Statements in the Notes to the Unaudited Consolidated Financial Statements included in this Amendment.
The Company has not modified or updated disclosures presented in the Original Filing, except to reflect the effects of the restatement of the Company’s financial statements and disclose the material weaknesses in our internal control over financial reporting that has been identified since the date of the Annual Report on Form 10-K, as described above. Accordingly, this Amendment does not reflect events occurring after the Original Filing, except as noted above, and this Amendment continues to speak as of the date of the Original Filing. Therefore, this Amendment should be read in conjunction with the Company’s other filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing, including any amendments to those filings.



Table of Contents

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

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Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
 
(Restated)
 
 
 
(Restated)
 
 
SALES
$
163,145

 
$
154,889

 
$
306,332

 
$
261,942

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
123,096

 
127,861

 
238,995

 
204,520

Selling and general expenses
13,861

 
14,703

 
27,098

 
28,100

Other operating income, net (Note 20)
(11,389
)
 
(3,624
)
 
(11,764
)
 
(7,772
)
 
125,568

 
138,940

 
254,329

 
224,848

Equity in income of New Zealand joint venture

 
304

 

 
562

OPERATING INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
37,577

 
16,253

 
52,003

 
37,656

Gain related to consolidation of New Zealand joint venture (Note 7)

 
16,098

 

 
16,098

OPERATING INCOME
37,577

 
32,351

 
52,003

 
53,754

Interest expense
(15,612
)
 
(11,351
)
 
(26,286
)
 
(19,803
)
Interest and miscellaneous (expense) income, net
(4,385
)
 
2,684

 
(5,397
)
 
2,766

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
17,580

 
23,684

 
20,320

 
36,717

Income tax (expense) benefit
(13,556
)
 
15,947

 
(5,961
)
 
21,942

INCOME FROM CONTINUING OPERATIONS
4,024

 
39,631

 
14,359

 
58,659

DISCONTINUED OPERATIONS, NET (Note 2)
 
 
 
 
 
 
 
Income from discontinued operations, net of income tax expense of $5,966, $31,177, $21,231 and $63,868
12,084

 
48,260

 
43,092

 
176,967

NET INCOME
16,108

 
87,891

 
57,451

 
235,626

Less: Net (loss) income attributable to noncontrolling interest
(245
)
 
727

 
(328
)
 
727

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
16,353

 
87,164

 
57,779

 
234,899

OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Foreign currency translation adjustment
3,517

 
(28,201
)
 
21,320

 
(27,226
)
New Zealand joint venture cash flow hedges, net of income tax (benefit) expense of ($401), $0, $100 and $0
(920
)
 
222

 
791

 
775

Net gain from pension and postretirement plans, net of income tax expense of $35,944, $1,620, $36,875 and $3,824
58,873

 
3,717

 
60,970

 
8,687

Total other comprehensive income (loss)
61,470

 
(24,262
)
 
83,081

 
(17,764
)
COMPREHENSIVE INCOME
77,578

 
63,629

 
140,532

 
217,862

Less: Comprehensive income (loss) attributable to noncontrolling interest
297

 
(9,505
)
 
5,722

 
(9,505
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
77,281

 
$
73,134

 
$
134,810

 
$
227,367

EARNINGS PER COMMON SHARE (Note 4)
 
 
 
 
 
 
 
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.03

 
$
0.31

 
$
0.12

 
$
0.46

Discontinued Operations
0.10

 
0.38

 
0.34

 
1.42

Net Income
$
0.13

 
$
0.69

 
$
0.46

 
$
1.88

DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations
$
0.03

 
$
0.30

 
$
0.11

 
$
0.44

Discontinued Operations
0.09

 
0.37

 
0.33

 
1.36

Net Income
$
0.12

 
$
0.67

 
$
0.44

 
$
1.80


See Notes to Consolidated Financial Statements.

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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
June 30, 2014
 
December 31, 2013
 
(Restated)
 
 
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
222,061

 
$
199,644

Restricted cash
75,000

 

Accounts receivable, less allowance for doubtful accounts of $622 and $673
19,765

 
94,956

Inventory
 
 
 
Finished goods
17,622

 
115,270

Work in progress

 
3,555

Raw materials
862

 
17,661

Manufacturing and maintenance supplies

 
2,332

Total inventory
18,484

 
138,818

Deferred tax assets
3,221

 
39,100

Prepaid and other current assets
21,543

 
46,576

Total current assets
360,074

 
519,094

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,117,655

 
2,049,378

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
1,833

 
20,138

Buildings
8,468

 
180,573

Machinery and equipment
3,333

 
1,760,641

Construction in progress
274

 
19,795

Total property, plant and equipment, gross
13,908

 
1,981,147

Less — accumulated depreciation
(7,765
)
 
(1,120,326
)
Total property, plant and equipment, net
6,143

 
860,821

OTHER ASSETS
148,104

 
256,208

TOTAL ASSETS
$
2,631,976

 
$
3,685,501

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable
$
27,871

 
$
69,293

Current maturities of long-term debt

 
112,500

Accrued taxes
13,834

 
8,551

Uncertain tax positions
5,780

 
10,547

Accrued payroll and benefits
5,316

 
24,948

Accrued interest
9,743

 
9,531

Accrued customer incentives

 
9,580

Other current liabilities
28,865

 
24,327

Current liabilities for dispositions and discontinued operations (Note 14)

 
6,835

Total current liabilities
91,409

 
276,112

LONG-TERM DEBT
770,086

 
1,461,724

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 14)

 
69,543

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 17)
24,014

 
95,654

OTHER NON-CURRENT LIABILITIES
30,600

 
27,225

COMMITMENTS AND CONTINGENCIES (Notes 13 and 15)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 126,529,693 and 126,257,870 shares issued and outstanding
698,462

 
692,100

Retained earnings
887,648

 
1,015,209

Accumulated other comprehensive income (loss)
30,891

 
(46,139
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,617,001

 
1,661,170

Noncontrolling interest
98,866

 
94,073

TOTAL SHAREHOLDERS’ EQUITY
1,715,867

 
1,755,243

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,631,976

 
$
3,685,501


See Notes to Consolidated Financial Statements.

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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2014
 
2013
 
(Restated)
 
 
OPERATING ACTIVITIES
 
 
 
Net income
$
57,451

 
$
235,626

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
58,411

 
50,857

Non-cash cost of real estate sold
3,302

 
2,593

Stock-based incentive compensation expense
5,980

 
6,226

Deferred income taxes
10,103

 
38,107

Tax benefit of AFMC for CBPC exchange

 
(18,761
)
Depreciation and amortization from discontinued operations
37,985

 
29,356

Amortization of losses from pension and postretirement plans
5,896

 
11,617

Gain on sale of discontinued operations, net

 
(42,670
)
Gain related to consolidation of New Zealand joint venture

 
(16,098
)
Other
(43
)
 
(8,653
)
Changes in operating assets and liabilities:
 
 
 
Receivables
9,988

 
(11,782
)
Inventories
4,765

 
27,325

Accounts payable
27,307

 
19,535

Income tax receivable/payable
5,217

 
(5,626
)
All other operating activities
5,130

 
(7,654
)
Payment to exchange AFMC for CBPC

 
(70,311
)
Expenditures for dispositions and discontinued operations
(5,096
)
 
(4,015
)
CASH PROVIDED BY OPERATING ACTIVITIES
226,396

 
235,672

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(80,494
)
 
(74,587
)
Purchase of additional interest in New Zealand joint venture

 
(139,879
)
Purchase of timberlands
(74,817
)
 
(10,447
)
Jesup mill cellulose specialties expansion (gross purchases of $0 and $114,449, net of purchases on account of $0 and $14,264)

 
(100,185
)
Proceeds from disposition of Wood Products business

 
72,953

Change in restricted cash
63,128

 
7,603

Other
(478
)
 
537

CASH USED FOR INVESTING ACTIVITIES
(92,661
)
 
(244,005
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
1,238,389

 
455,000

Repayment of debt
(1,107,062
)
 
(273,087
)
Dividends paid
(124,628
)
 
(113,222
)
Proceeds from the issuance of common shares
3,347

 
6,643

Excess tax benefits on stock-based compensation

 
7,399

Repurchase of common shares
(1,834
)
 
(11,241
)
Debt issuance costs
(12,380
)
 

Purchase of timberland deeds for Rayonier Advanced Materials
(12,677
)
 

Debt issuance funds distributed to Rayonier Advanced Materials
(924,943
)
 

Proceeds from spin-off of Rayonier Advanced Materials
906,200

 

Change in restricted cash reserved for dividends
(75,000
)
 

Other
(680
)
 

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(111,268
)
 
71,492

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(50
)
 
(174
)
CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
22,417

 
62,985

Balance, beginning of year
199,644

 
280,596

Balance, end of period
$
222,061

 
$
343,581

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
Cash paid during the period:
 
 
 
Interest
$
26,980

 
$
16,754

Income taxes
10,417

 
84,508

Non-cash investing activity:
 
 
 
Capital assets purchased on account
11,547

 
59,729

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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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 fiscal year ended December 31, 2013, as amended by Amendment No. 1 to the Form 10-K on Form 10-K/A (the “Amended Form 10-K”), as filed with the SEC.
Reclassifications
Certain 2013 amounts and amounts previously reported in 2014 have been reclassified to agree with the current presentation, including reclassifications for discontinued operations. Rayonier completed the spin-off of its Performance Fibers business on June 27, 2014 and completed the sale of its Wood Products business on March 1, 2013. Accordingly, the operating results of these businesses are reported 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 segments, which remained with Rayonier, are reported in continuing operations.
The December 31, 2013 Consolidated Balance Sheet reports historical information and includes balances for all businesses as reported in the prior year. The June 30, 2014 Consolidated Balance Sheet reports continuing operations only and reflects the contribution of $1.2 billion of assets, net, and corresponding liabilities and equity to Rayonier Advanced Materials in connection with the spin-off of the Performance Fibers business.
The Consolidated Statements of Cash Flows for both 2014 and 2013 have not been restated to exclude Performance Fibers or Wood Products cash flows. Cash flows for the six months ended June 30, 2014 also reflect transactions related to the Performance Fibers spin-off, including borrowings to arrange the capital structure prior to the separation, proceeds received upon the spin-off and the use of proceeds to pay down debt and reserve cash for a special dividend payment during the third quarter of 2014.
See Note 2Discontinued Operations for additional information regarding the spin-off of the Performance Fibers business and sale of the Wood Products business.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) jointly issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard which will supersede current revenue recognition guidance. The core principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to receive in exchange for those goods or services. The guidance provides a unified model to determine when and how revenue is recognized and will require enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. This standard will be effective for Rayonier beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The standard requires a disposal of a component of an entity to be reported in discontinued operations if it represents a strategic shift with a major effect on an entity’s operations and financial results. It also removes requirements related to the evaluation of the component’s effect on ongoing operations and the entity’s continuing involvement with the component. Additional disclosures about discontinued operations are also required under this standard. ASU No. 2014-08 is required to be applied prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning December 15, 2014. As the Company has not elected early adoption, this standard will be effective for Rayonier’s first quarter 2015 Form 10-Q filing. It is not expected that the standard will have any impact on the Company’s consolidated financial statements.

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

Subsequent Events
The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued, and three subsequent events were identified that warranted disclosure. On July 21, 2014, the Board of Directors approved a third quarter cash dividend of 30 cents per common share. The dividend is payable on September 30, 2014 to shareholders of record on September 16, 2014. In addition to the regular third quarter cash dividend, the Board of Directors approved a special cash dividend of 50 cents per common share payable on August 15, 2014 to shareholders of record on July 31, 2014. Additionally, amendments to the Company’s revolving credit facility and term credit agreement became effective in July 2014, as discussed in Note 18Debt.

2.
DISCONTINUED OPERATIONS
Spin-Off of the Performance Fibers Business
On June 27, 2014, Rayonier completed its previously announced tax-free spin-off of its Performance Fibers business from its Forest Resources and Real Estate segments. The spin-off resulted in two independent, publicly-traded companies, with the Performance Fibers business being spun-off to Rayonier shareholders as a newly formed public company named Rayonier Advanced Materials. On June 27, 2014, the shareholders of record received one share of Rayonier Advanced Materials common stock for every three common shares of Rayonier held as of the close of business on the record date of June 18, 2014.
In connection with the spin-off, Rayonier Advanced Materials distributed $906.2 million in cash to Rayonier from $550 million in Senior Notes issued by Rayonier A.M. Products (a wholly-owned subsidiary of Rayonier Advanced Materials), $325 million in term loans, and $75 million from a revolving credit facility Rayonier Advanced Materials entered into prior to the spin-off. Under the terms of the Internal Revenue Service spin-off ruling, $75 million of these funds is restricted to pay dividends or repurchase common stock within eighteen months following the distribution of the shares of Rayonier Advanced Materials common stock to Rayonier shareholders. At June 30, 2014, $75 million was included in the “Restricted cash” line in the Consolidated Balance Sheets.
In order to effect the spin-off and govern our relationship with Rayonier Advanced Materials after the spin-off, Rayonier entered into a Separation and Distribution Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, an Employee Matters Agreement and a Transition Services Agreement.
The Separation and Distribution Agreement governs the spin-off of the Performance Fibers business and the transfer of assets and other matters related to our relationship with Rayonier Advanced Materials. The Separation and Distribution Agreement provides for cross-indemnities between Rayonier and Rayonier Advanced Materials and established procedures for handling claims subject to indemnification and related matters.
The Intellectual Property Agreement governs the allocation of intellectual property rights and assets between Rayonier and Rayonier Advanced Materials.
The Tax Sharing Agreement governs the respective rights, responsibilities and obligations of Rayonier and Rayonier Advanced Materials with respect to taxes, tax attributes, tax returns, tax proceedings and certain other tax matters including assistance and cooperation on tax matters.

The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Rayonier and Rayonier Advanced Materials, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Rayonier Advanced Materials will no longer participate in benefit plans sponsored or maintained by Rayonier. In addition, the Employee Matters Agreement provides that each of the parties will be responsible for their respective current employees and compensation plans for such current employees. The Employee Matters Agreement further provides that Rayonier Advanced Materials will be responsible for liabilities associated with former employees whose last employment was with the businesses that are to be operated by Rayonier Advanced Materials after the spin-off, including the Performance Fibers business, as well as certain specified former corporate employees, and Rayonier will remain responsible for former employees whose last employment was with the businesses retained by Rayonier following the spin-off and certain specified corporate employees.

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

The Transition Services Agreement sets forth the terms on which Rayonier will provide to Rayonier Advanced Materials, and Rayonier Advanced Materials will provide to Rayonier, certain services or functions that were shared prior to the spin-off. Transition services include administrative, payroll, human resources, data processing, environmental health and safety, financial audit support, financial transaction support, and other support services, information technology systems and various other corporate services. The agreement provides for the provision of specified transition services, generally for a period of up to 18 months, on a cost basis.
Rayonier will not have significant continuing involvement in the operations of the Performance Fibers business going forward. Accordingly, the operating results of the Performance Fibers 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 Performance Fibers segment, which will remain with the Company after the sale, are reported in continuing operations.
The following table summarizes the operating results of the Company's discontinued operations related to the Performance Fibers spin-off for the three and six months ended June 30, 2014 and 2013, 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,
 
2014
 
2013
 
2014
 
2013
Sales
$
212,680

 
$
254,189

 
$
456,180

 
$
540,855

Cost of sales and other
(174,961
)
 
(174,650
)
 
(368,868
)
 
(366,584
)
Transaction expenses
(19,669
)
 
(102
)
 
(22,989
)
 
(186
)
Income from discontinued operations before income taxes
18,050

 
79,437

 
64,323

 
174,085

Income tax expense
(5,966
)
 
(31,177
)
 
(21,231
)
 
(41,595
)
Income from discontinued operations, net
$
12,084

 
$
48,260

 
$
43,092

 
$
132,490


In accordance with ASC 205-20-S99-3, Allocation of Interest to Discontinued Operations, the Company elected to allocate interest expense to discontinued operations where the debt is not directly attributed to the Performance Fibers business.  Interest expense has been allocated based on a ratio of net assets to be discontinued to the sum of consolidated net assets plus consolidated debt (other than debt directly attributable to the Forest Resources and Real Estate operations). The following table summarizes the interest expense allocated to discontinued operations for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Interest allocated to the Performance Fibers business
$
(1,910
)
 
$
(1,851
)
 
$
(4,205
)
 
$
(3,797
)
The following table summarizes the depreciation, amortization and capital expenditures of the Company's discontinued operations related to the Performance Fibers business:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Depreciation and amortization
$
17,336

 
$
13,649

 
$
37,985

 
$
28,802

Capital expenditures
24,621

 
48,817

 
46,336

 
70,182

Jesup mill cellulose specialties expansion

 
63,451

 

 
100,185


6


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

The major classes of Performance Fibers assets and liabilities included in the spin-off are as follows:
 
June 27, 2014
Accounts receivable, net
$
66,050

Inventory
121,705

Prepaid and other current assets
70,092

Property, plant and equipment, net
862,487

Other assets
103,400

Total assets
$
1,223,734

 

Accounts payable
65,522

Other current liabilities
51,006

Long-Term debt
950,000

Non-current environmental liabilities
66,434

Pension and other postretirement benefits
102,633

Other non-current liabilities
7,269

Deficit
(19,130
)
Total liabilities and equity
$
1,223,734


Pursuant to a Memorandum of Understanding agreement, Rayonier may provide Rayonier Advanced Materials with up to 120,000 tons of hardwood annually through July 30, 2017. Prior to the spin-off, hardwood purchases were intercompany transactions eliminated in consolidation as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Hardwood purchases
$
1,190

 
$
350

 
$
3,935

 
$
259


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. 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 the six months ended June 30, 2013.
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.

7


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 operating results of the Company’s Wood Products discontinued operations and the related gain for the six months ended June 30, 2013, as presented in “Income from discontinued operations, net” on the Consolidated Statements of Income and Comprehensive Income:
 
Six Months Ended
 
June 30, 2013
Sales
$
16,968

Cost of sales and other
(14,258
)
Gain on sale of discontinued operations
64,040

Income from discontinued operations before income taxes
$
66,750

Income tax expense
(22,273
)
Income from discontinued operations, net
$
44,477

Cash flows from the Wood Products business are immaterial in the aggregate. As such, they are included with cash flows from continuing operations in the Consolidated Statements of Cash Flows.
The following table reconciles the operating results of both the Performance Fibers and Wood Products discontinued operations, as presented in “Income from discontinued operations, net” on the Consolidated Statements of Income and Comprehensive Income:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Performance Fibers income from discontinued operations, net
$
12,084

 
$
48,260

 
$
43,092

 
$
132,490

Wood Products income from discontinued operations, net

 

 

 
44,477

Income from discontinued operations, net
$
12,084

 
$
48,260

 
$
43,092

 
$
176,967



8


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

3.
RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to the issuance of the Original Filing, the Company identified issues related to its historical timber harvest levels, its estimate of merchantable timber inventory and the effect of such estimate on its calculation of depletion expense in the quarterly periods ended March 31, 2014 and June 30, 2014. The Company determined that it had understated its depletion expense in cost of goods sold (referred to as “Cost of sales” in the Company’s consolidated statements of income and comprehensive income) by approximately $2 million for each period. As a result, the financial amounts noted below have been restated from amounts previously reported.

The following tables summarize the effect of these restatements for the periods:
 
 
Consolidated Statements of Income
and Comprehensive Income for the
Three Months Ended June 30, 2014

 
 
As Previously Reported
 
Restatement
 
As Restated
Operating Income
 
$
39,568

 
$
(1,991
)
 
$
37,577

Income Tax Expense
 
(13,515
)
 
(41
)
 
(13,556
)
Income from Continuing Operations
 
6,056

 
(2,032
)
 
4,024

Income from Discontinued Operations, net
 
12,084

 

 
12,084

Net Income
 
18,140

 
(2,032
)
 
16,108

Net Income Attributable to Rayonier Inc.
 
18,385

 
(2,032
)
 
16,353

Basic Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.05

 
$
(0.02
)
 
$
0.03

Discontinued Operations
 
0.10

 

 
0.10

Net Income
 
$
0.15

 
$
(0.02
)
 
$
0.13

Diluted Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.05

 
$
(0.02
)
 
$
0.03

Discontinued Operations
 
0.09

 

 
0.09

Net Income
 
$
0.14

 
$
(0.02
)
 
$
0.12


9


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

 
 
Consolidated Statements of Income
and Comprehensive Income for the
Six Months Ended June 30, 2014

 
 
As Previously Reported
 
Restatement
 
As Restated
Operating Income
 
$
55,962

 
$
(3,959
)
 
$
52,003

Income Tax Expense
 
(5,939
)
 
(22
)
 
(5,961
)
Income from Continuing Operations
 
18,340

 
(3,981
)
 
14,359

Income from Discontinued Operations, net
 
43,092

 

 
43,092

Net Income
 
61,432

 
(3,981
)
 
57,451

Net Income Attributable to Rayonier Inc.
 
61,760

 
(3,981
)
 
57,779

Basic Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.15

 
$
(0.03
)
 
$
0.12

Discontinued Operations
 
0.34

 

 
0.34

Net Income
 
$
0.49

 
$
(0.03
)
 
$
0.46

Diluted Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.14

 
$
(0.03
)
 
$
0.11

Discontinued Operations
 
0.33

 

 
0.33

Net Income
 
$
0.47

 
$
(0.03
)
 
$
0.44

 
 
Consolidated Balance Sheet
as of June 30, 2014

 
 
As Previously Reported
 
Restatement
 
As Restated
Prepaid and Other Current Assets
 
$
21,565

 
$
(22
)
 
$
21,543

Timber and Timberlands, Net of Depletion and Amortization
 
2,121,614

 
(3,959
)
 
2,117,655

Retained earnings
 
891,629

 
(3,981
)
 
887,648

 
 
Consolidated Statements of Income
and Comprehensive Income for the
Three Months Ended March 31, 2014

 
 
As Previously Reported (a)
 
Restatement
 
As Restated (a)
Operating Income
 
$
65,008

 
$
(1,969
)
 
$
63,039

Income Tax Expense
 
(7,732
)
 
20

 
(7,712
)
Income from Continuing Operations
 
43,292

 
(1,949
)
 
41,343

Net Income
 
43,292

 
(1,949
)
 
41,343

Net Income Attributable to Rayonier Inc.
 
43,375

 
(1,949
)
 
41,426

Basic Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.34

 
$
(0.01
)
 
$
0.33

Discontinued Operations
 

 

 

Net Income
 
$
0.34

 
$
(0.01
)
 
$
0.33

Diluted Earnings Per Share Attributable to Rayonier Inc.
 
 
 
 
 
 
Continuing Operations
 
$
0.34

 
$
(0.02
)
 
$
0.32

Discontinued Operations
 

 

 

Net Income
 
$
0.34

 
$
(0.02
)
 
$
0.32

(a)Includes the Performance Fibers business that was spun-off on June 27, 2014.

10


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

 
 
Consolidated Balance Sheet
as of March 31, 2014

 
 
As Previously Reported
 
Restatement
 
As Restated
Prepaid and Other Current Assets
 
$
54,557

 
$
20

 
$
54,577

Timber and Timberlands, Net of Depletion and Amortization
 
2,069,518

 
(1,969
)
 
2,067,549

Retained earnings
 
996,573

 
(1,949
)
 
994,624


4.
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,
 
2014
 
2013
 
2014
 
2013
 
(Restated)
 
 
 
(Restated)
 
 
Income from continuing operations
$
4,024

 
$
39,631

 
$
14,359

 
$
58,659

Less: Net (loss) income from continuing operations attributable to noncontrolling interest
(245
)
 
727

 
(328
)
 
727

Income from continuing operations attributable to Rayonier Inc.
$
4,269

 
$
38,904

 
$
14,687

 
$
57,932

 
 
 
 
 
 
 
 
Income from discontinued operations, net, attributable to Rayonier Inc.
$
12,084

 
$
48,260

 
$
43,092

 
$
176,967

 
 
 
 
 
 
 
 
Net income attributable to Rayonier Inc.
$
16,353

 
$
87,164

 
$
57,779

 
$
234,899

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per common share
126,434,376

 
126,027,297

 
126,390,891

 
125,257,876

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
293,213

 
504,321

 
296,768

 
519,014

Performance and restricted shares
201,956

 
386,228

 
194,995

 
384,910

Assumed conversion of Senior Exchangeable Notes (a)
2,631,514

 
2,217,058

 
2,579,402

 
2,173,658

Assumed conversion of warrants (a) (b)
2,738,606

 
1,632,345

 
2,656,633

 
2,250,361

Shares used for determining diluted earnings per common share
132,299,665

 
130,767,249

 
132,118,689

 
130,585,819

Basic earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.31

 
$
0.12

 
$
0.46

Discontinued operations
0.10

 
0.38

 
0.34

 
1.42

Net income
$
0.13

 
$
0.69

 
$
0.46

 
$
1.88

Diluted earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.03

 
$
0.30

 
$
0.11

 
$
0.44

Discontinued operations
0.09

 
0.37

 
0.33

 
1.36

Net income
$
0.12

 
$
0.67

 
$
0.44

 
$
1.80


11


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,
 
2014
 
2013
 
2014
 
2013
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
 
 
 
 
Stock options, performance and restricted shares
507,044

 
199,245

 
499,193

 
207,097

Assumed conversion of exchangeable note hedges (a)
2,631,514

 
2,217,058

 
2,579,402

 
2,173,658

Total
3,138,558

 
2,416,303

 
3,078,595

 
2,380,755

(a) Rayonier will not issue additional shares upon future exchange or 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 2015 Notes to be included in dilutive shares if the average stock price for the period exceeds the strike price, while the assumed conversion of the hedges is excluded since they are anti-dilutive. As such, the full dilutive effect of the 2015 Notes was included for all periods presented.
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. 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 of 2013 and 97,918 shares were issued in the first week of April 2013. 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 $28.58 per share. The exchange price on the warrants is lower than prior periods as it has been adjusted to reflect the spin-off of the Performance Fibers business. For further information, see Note 13 — Debt in the Amended Form 10-K and Note 18Debt of this Form 10-Q/A.
(b) The shares used for the assumed conversion of the warrants increased for the current quarter and year-to-date periods due to a lower adjusted exchange price as a result of the spin-off.

5.
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 qualifying activities, and foreign operations, are subject to corporate income taxes. 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. Prior to the spin-off (See Note 2Discontinued Operations for additional information), Rayonier produced and used an alternative fuel (“black liquor”) at its 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 a $70 million tax payment to exchange approximately 120 million gallons of black liquor previously claimed for the AFMC for the CBPC, resulting in an expected net $19 million tax benefit, which was recorded in discontinued operations. As a result of the spin-off of the Performance Fibers business in second quarter 2014, the Company recorded a $16 million valuation allowance related to its limited potential use of the CBPC prior to its expiration on December 31, 2016.
Provision for Income Taxes from Continuing Operations
The Company’s effective tax rate before discrete items is below the 35 percent U.S. statutory rate due to tax benefits associated with being a REIT and tax benefits from losses at Rayonier's taxable operations from interest and general administrative expenses not allowed to be allocated to the discontinued operations of the Performance Fibers business. Despite the tax benefits associated with being a REIT and losses at Rayonier’s taxable operations, the increase in the effective tax rates as reported for the quarter and year-to-date periods is primarily attributable to the CBPC valuation allowance recorded in second quarter 2014.

12


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

The tables below reconcile the U.S. statutory rate to the Company’s effective tax rate for each period presented:
 
Three Months Ended June 30,
 
2014
 
2013
 
(Restated)
 
(Restated)
 
 
 
 
Income tax expense at federal statutory rate
$
6,153

 
35.0
 %
 
$
8,289

 
35.0
 %
REIT income and taxable losses
(5,625
)
 
(32.0
)
 
(20,001
)
 
(84.4
)
Reverse loss on FMV of exchangeable notes

 

 
828

 
3.5

Foreign operations
(728
)
 
(4.1
)
 
458

 
1.9

Non-deductible real estate losses
590

 
3.4

 

 

Other
119

 
0.6

 
115

 
0.5

Income tax expense (benefit) before discrete items
509

 
2.9
 %
 
(10,311
)
 
(43.5
)%
CBPC valuation allowance
15,574

 
88.7

 

 

Spin-off related costs
797

 
4.5

 

 

Deferred tax inventory valuations
(3,293
)
 
(18.7
)
 

 

Gain related to consolidation of New Zealand joint venture

 

 
(5,636
)
 
(23.8
)
Other
(31
)
 
(0.3
)
 

 

Income tax expense (benefit) as reported for continuing operations
$
13,556

 
77.1
 %
 
$
(15,947
)
 
(67.3
)%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2014
 
2013
 
(Restated)
 
(Restated)
 
 
 
 
Income tax expense at federal statutory rate
$
7,112

 
35.0
 %
 
$
12,851

 
35.0
 %
REIT income and taxable losses
(13,823
)
 
(69.3
)
 
(31,324
)
 
(85.3
)
Foreign operations
(841
)
 
(0.3
)
 
1,517

 
4.1

Non-deductible real estate losses
681

 
1.2

 

 

Reverse loss on FMV of exchangeable notes

 

 
1,284

 
3.5

Other
138

 
0.3

 
(151
)
 
(0.4
)
Income tax benefit before discrete items
(6,733
)
 
(33.1
)%
 
(15,823
)
 
(43.1
)%
CBPC valuation allowance
15,574

 
76.6

 

 

Spin-off related costs
797

 
3.9

 

 

Deferred tax inventory valuations
(3,293
)
 
(16.2
)
 

 

Gain related to consolidation of New Zealand joint venture

 

 
(5,636
)
 
(15.3
)
Other
(384
)
 
(1.9
)
 
(483
)
 
(1.4
)
Income tax expense (benefit) as reported for continuing operations
$
5,961

 
29.3
 %
 
$
(21,942
)
 
(59.8
)%
 
 
 
 
 
 
 
 
Provision for Income Taxes from Discontinued Operations
In second quarter 2014, Rayonier completed the spin-off of its Performance Fibers business. For the three and six months ended June 30, 2014, income tax expense related to Performance Fibers discontinued operations was $6.0 million and $21.2 million, respectively. For the three and six months ended June 30, 2013, income tax expense related to Performance Fibers discontinued operations was $31.2 million and $41.6 million, respectively.
In first quarter 2013, 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, income tax expense related to Wood Products discontinued operations was $22.3 million ($21.4 million from the gain on sale).

13


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

See Note 2Discontinued Operations for additional information on the spin-off of the Performance Fibers business and sale of the Wood Products business.
Unrecognized Tax Benefits
During second quarter 2014, the Company received a refund from the IRS related to its amended 2009 TRS tax return. As a result, Rayonier reversed the $4.8 million reserve related to the increased domestic production deduction due to the inclusion of CBPC income. The reserve was comprised of a $3.9 million reduction of current deferred tax assets and a $0.9 million unrecognized tax benefit, which was recorded in discontinued operations.
During the first quarter of 2013, the Company implemented ASU 2013-11, which requires, in certain instances, an unrecognized tax benefit (or portion of an unrecognized tax benefit) to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. As a result, the Company reclassified $3.9 million from an unrecognized tax benefit liability to a reduction to current deferred tax assets at March 31, 2014.
Deferred Taxes
The spin-off of the Performance Fibers business resulted in the contribution of deferred tax assets and deferred tax liabilities to Rayonier Advanced Materials and impacted the Company’s expected future use of remaining deferred tax assets. The Company’s current portion of deferred tax assets decreased from $39.1 million at December 31, 2013 to $3.2 million as of June 30, 2014. The remaining balance reflects the $15.6 million valuation allowance related to Rayonier’s limited potential use of the CBPC credit. In addition, the Company’s non-current deferred tax asset decreased $3.0 million from year-end while the non-current deferred tax liability increased $8.7 million.

6.
RESTRICTED CASH AND DEPOSITS
Pursuant to the Internal Revenue Service spin-off ruling, $75 million of the proceeds received from Rayonier Advanced Materials are restricted to pay dividends or repurchase common stock within eighteen months following the spin-off. These funds are included within the “Restricted cash” line of the Consolidated Balance Sheet and will be used to pay a special dividend of $0.50 per share in third quarter 2014.
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, 2014 and December 31, 2013, the Company had $5.8 million and $68.9 million, respectively, of proceeds from real estate sales classified as restricted cash within Other Assets, which were deposited with an LKE intermediary.


14


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

7.
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 June 30, 2014 and December 31, 2013. The portions of the consolidated financial position and results of operations attributable to the New Zealand 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.
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 was acquired for $139.9 million and 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. The acquisition-date fair value of the previous equity interest was $93.3 million.
The Company’s operating results for the three and six months ended June 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 following represents the pro forma Rayonier consolidated sales and net income for the three and six months ended June 30, 2013 as if the additional interest in the New Zealand JV had been acquired on January 1, 2013.
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
Sales
$
409,077

 
$
837,322

Net Income
$
87,891

 
$
233,867


15


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

8.
SHAREHOLDERS’ EQUITY
 An analysis of shareholders’ equity for the six months ended June 30, 2014 and the year ended December 31, 2013 is shown below (share amounts not in thousands):
 
Rayonier Inc. Shareholders Equity
 
 
 
 
 
Common Shares
 
Retained
Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Non-controlling Interest
 
Total Shareholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
(Restated)
 
 
 
 
 
(Restated)
Balance, December 31, 2012
123,332,444

 
$
670,749

 
$
876,634

 
$
(109,379
)
 
$

 
$
1,438,004

Net income

 

 
371,896

 

 
1,902

 
373,798

Dividends ($1.86 per share)

 

 
(233,321
)
 

 

 
(233,321
)
Issuance of shares under incentive stock plans
1,001,426

 
10,101

 

 

 

 
10,101

Stock-based compensation

 
11,710

 

 

 

 
11,710

Excess tax benefit on stock-based compensation

 
8,413

 

 

 

 
8,413

Repurchase of common shares
(211,221
)
 
(11,326
)
 

 

 

 
(11,326
)
Equity portion of convertible debt upon redemption

 
2,453

 

 

 

 
2,453

Settlement of warrants
2,135,221

 

 

 

 

 

Net gain from pension and postretirement plans

 

 

 
61,869

 

 
61,869

Acquisition of noncontrolling interest

 

 

 

 
96,336

 
96,336

Noncontrolling interest redemption of shares

 

 

 

 
(713
)
 
(713
)
Foreign currency translation adjustment

 

 

 
(1,915
)
 
(3,795
)
 
(5,710
)
Joint venture cash flow hedges

 

 

 
3,286

 
343

 
3,629

Balance, December 31, 2013
126,257,870

 
$
692,100

 
$
1,015,209

 
$
(46,139
)
 
$
94,073

 
$
1,755,243

Net income (loss)

 

 
57,779

 

 
(328
)
 
57,451

Dividends ($0.98 per share)

 

 
(123,947
)
 

 

 
(123,947
)
Contribution to Rayonier Advanced Materials

 
(301
)
 
(61,393
)
 
80,749

 

 
19,055

Issuance of shares under incentive stock plans
315,739

 
3,347

 

 

 

 
3,347

Stock-based compensation

 
5,980

 

 

 

 
5,980

Excess tax deficiency on stock-based compensation

 
(830
)
 

 

 

 
(830
)
Repurchase of common shares
(43,916
)
 
(1,834
)
 

 

 

 
(1,834
)
Net losses from pension and postretirement plans

 

 

 
(19,779
)
 

 
(19,779
)
Noncontrolling interest redemption of shares

 

 

 

 
(930
)
 
(930
)
Foreign currency translation adjustment

 

 

 
15,546

 
5,774

 
21,320

Joint venture cash flow hedges

 

 

 
514

 
277

 
791

Balance, June 30, 2014
126,529,693

 
$
698,462

 
$
887,648

 
$
30,891

 
$
98,866

 
$
1,715,867

 


16


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

9.
SEGMENT AND GEOGRAPHICAL INFORMATION
Rayonier operates in two reportable business segments: Forest Resources and Real Estate. Prior to the second quarter of 2014, the Company operated in three reportable business segments, which included Performance Fibers. On June 27, 2014, the Company spun-off its Performance Fibers business and its operations are shown as discontinued operations for all periods presented. See Note 2Discontinued Operations for additional information.
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 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:
 
June 30,
 
December 31,
 
2014
 
2013
ASSETS
(Restated)
 
 
Forest Resources
$
2,284,198

 
$
2,162,913

Real Estate
96,277

 
149,001

Other Operations
24,860

 
37,334

Corporate and other
226,641

 
257,608

Performance Fibers

 
1,078,645

Total
$
2,631,976

 
$
3,685,501


 
Three Months Ended June 30,
 
Six Months Ended June 30,
SALES
2014
 
2013
 
2014
 
2013
Forest Resources
$
101,120

 
$
109,060

 
$
205,799

 
$
166,162

Real Estate
34,017

 
13,376

 
39,547

 
37,673

Other Operations
29,224

 
32,709

 
64,910

 
58,458

Intersegment Eliminations
(1,216
)
 
(256
)
 
(3,924
)
 
(351
)
Total
$
163,145

 
$
154,889

 
$
306,332

 
$
261,942



17


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,
 
2014
 
2013
 
2014
 
2013
OPERATING INCOME
(Restated)
 
 
 
(Restated)
 
 
Forest Resources
$
19,919

 
$
20,890

 
$
45,466

 
$
34,145

Real Estate
27,764

 
6,105

 
28,490

 
22,947

Other Operations
(132
)
 
1,621

 
(544
)
 
1,719

Corporate and other (a)
(9,974
)
 
3,735

 
(21,409
)
 
(5,057
)
Total
$
37,577

 
$
32,351

 
$
52,003

 
$
53,754

(a)
The three and six months ended June 30, 2013 included a $16.1 million gain related to the consolidation of the New Zealand JV.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
DEPRECIATION, DEPLETION AND AMORTIZATION
(Restated)
 
 
 
(Restated)
 
 
Forest Resources
23,570

 
$
27,291

 
$
50,455

 
$
43,735

Real Estate
6,422

 
2,469

 
7,333

 
6,646

Corporate
341

 
293

 
623

 
476

Total
$
30,333

 
$
30,053

 
$
58,411

 
$
50,857


10.
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 Accounting Standards Codification 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. The Company’s hedge ineffectiveness was immaterial for all periods presented.
Foreign Currency Exchange and Option Contracts
The functional currency of the 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 New Zealand JV 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 12 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.

18


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

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 June 30, 2014, the Company’s interest rate contracts hedged 88 percent of the New Zealand JV’s variable rate debt and had maturity dates through January 2020.
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 June 30, 2014 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. Effective November 2013, the New Zealand JV has not entered into any new fuel swaps.
The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2014 and 2013.
 
 
 
Three Months Ended June 30,
 
Income Statement Location
 
2014
 
2013
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income (loss)
 
$
(818
)
 
$
(1,509
)
Foreign currency option contracts
Other comprehensive income (loss)
 
(504
)
 
(363
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Other operating expense (income)
 
$

 
$
456

Foreign currency option contracts
Other operating expense (income)
 

 
1,491

Interest rate swaps
Interest and miscellaneous (expense) income, net
 
(729
)
 
2,650

Fuel hedge contracts
Cost of sales (benefit)
 
(92
)
 
(148
)
 
 
 
Six Months Ended June 30,
 
Income Statement Location
 
2014
 
2013
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income (loss)
 
$
669

 
$
(1,509
)
Foreign currency option contracts
Other comprehensive income (loss)
 
221

 
(363
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Other operating expense (income)
 
$
25

 
$
(1,426
)
Foreign currency option contracts
Other operating expense (income)
 
7

 
1,491

Interest rate swaps
Interest and miscellaneous (expense) income, net
 
(1,862
)
 
2,650

Fuel hedge contracts
Cost of sales (benefit)
 
225

 
(148
)
During the next 12 months, the amount of the June 30, 2014 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a gain of approximately $1.8 million.

19


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 notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount (a)
 
June 30, 2014
 
December 31, 2013
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts
$
19,625

 
$
32,300

Foreign currency option contracts
46,000

 
38,000

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

 
$
1,950

Foreign currency option contracts

 
4,000

Interest rate swaps
180,658

 
183,851

Fuel hedge contracts
13

 
38

(a)
All notional amounts are stated in thousands of dollars except fuel contracts which are denominated in thousands of barrels.
The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Location on Balance Sheet
 
Fair Value Assets (Liabilities) (a)
 
 
 
June 30, 2014
 
December 31, 2013
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Prepaid and other current assets
 
$
1,726

 
$
915

Foreign currency option contracts
Prepaid and other current assets
 
846

 
673

 
Other current liabilities
 
(100
)
 
(214
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Prepaid and other current assets
 
$

 
$
25

Foreign currency option contracts
Prepaid and other current assets
 

 
8

Interest rate swaps
Other non-current liabilities
 
(5,051
)
 
(4,659
)
Fuel hedge contracts
Prepaid and other current assets
 

 
160

 
Other current liabilities
 
(67
)