Rayonier 2015 10Q 2Q2015
Table of Contents




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
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 July 31, 2015, there were outstanding 125,941,960 Common Shares of the registrant.


















Table of Contents

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

i


Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME
AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
SALES

$115,801

 

$163,145

 

$256,106

 

$306,332

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
103,689

 
123,096

 
210,923

 
238,995

Selling and general expenses
12,727

 
13,861

 
23,626

 
27,098

Other operating income, net (Note 17)
(7,138
)
 
(11,389
)
 
(12,713
)
 
(11,764
)
 
109,278

 
125,568

 
221,836

 
254,329

OPERATING INCOME
6,523

 
37,577

 
34,270

 
52,003

Interest expense
(8,483
)
 
(15,612
)
 
(17,027
)
 
(26,286
)
Interest income and miscellaneous expense, net
(1,196
)
 
(4,385
)
 
(2,691
)
 
(5,397
)
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
(3,156
)
 
17,580

 
14,552

 
20,320

Income tax benefit (expense)
296

 
(13,556
)
 
768

 
(5,961
)
(LOSS) INCOME FROM CONTINUING OPERATIONS
(2,860
)
 
4,024

 
15,320

 
14,359

DISCONTINUED OPERATIONS, NET (Note 2)
 
 
 
 
 
 
 
Income from discontinued operations, net of income tax expense of $0, $5,966, $0 and $21,231

 
12,084

 

 
43,092

NET (LOSS) INCOME
(2,860
)
 
16,108

 
15,320

 
57,451

Less: Net loss attributable to noncontrolling interest
(1,324
)
 
(245
)
 
(891
)
 
(328
)
NET (LOSS) INCOME ATTRIBUTABLE TO RAYONIER INC.
(1,536
)
 
16,353

 
16,211

 
57,779

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of income tax expense of $732, $0, $1,074 and $0
(25,395
)
 
3,517

 
(39,717
)
 
21,320

New Zealand joint venture cash flow hedges, net of income tax benefit (expense) of $1,133, $401, $1,501 and ($100)
(2,917
)
 
(920
)
 
(3,863
)
 
791

Amortization of pension and postretirement plans, net of income tax expense of $179, $35,944, $337 and $36,875
743

 
58,873

 
1,524

 
60,970

Total other comprehensive (loss) income
(27,569
)
 
61,470

 
(42,056
)
 
83,081

COMPREHENSIVE (LOSS) INCOME
(30,429
)
 
77,578

 
(26,736
)
 
140,532

Less: Comprehensive (loss) income attributable to noncontrolling interest
(9,731
)
 
297

 
(13,522
)
 
5,722

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO RAYONIER INC.

($20,698
)
 

$77,281

 

($13,214
)
 

$134,810

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

($0.01
)
 

$0.03

 

$0.13

 

$0.12

Discontinued Operations

 
0.10

 

 
0.34

Net (Loss) Income

($0.01
)
 

$0.13

 

$0.13

 

$0.46

DILUTED (LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
 
 
 
 
 
 
 
Continuing Operations

($0.01
)
 

$0.03

 

$0.13

 

$0.11

Discontinued Operations

 
0.09

 

 
0.33

Net (Loss) Income

($0.01
)
 

$0.12

 

$0.13

 

$0.44

 
 
 
 
 
 
 
 
Dividends declared per share

$0.25

 

$0.49

 

$0.50

 

$0.98


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
June 30, 2015
 
December 31, 2014
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents

$91,632

 

$161,558

Accounts receivable, less allowance for doubtful accounts of $42 and $42
19,444

 
24,018

Inventory (Note 14)
13,362

 
8,383

Prepaid and other current assets
21,222

 
19,745

Total current assets
145,660

 
213,704

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,086,729

 
2,088,501

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT
     COSTS (NOTE 5)
69,726

 
77,433

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
1,833

 
1,833

Buildings
8,977

 
8,961

Machinery and equipment
3,388

 
3,503

Construction in progress
772

 
579

Total property, plant and equipment, gross
14,970

 
14,876

Less — accumulated depreciation
(8,536
)
 
(8,170
)
Total property, plant and equipment, net
6,434

 
6,706

OTHER ASSETS
57,772

 
66,771

TOTAL ASSETS

$2,366,321

 

$2,453,115

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$22,396

 

$20,211

Current maturities of long-term debt
30,000

 
129,706

Accrued taxes
15,811

 
11,405

Accrued payroll and benefits
4,596

 
6,390

Accrued interest
8,043

 
8,433

Other current liabilities
31,614

 
25,857

Total current liabilities
112,460

 
202,002

LONG-TERM DEBT
722,353

 
621,849

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)
33,396

 
33,477

OTHER NON-CURRENT LIABILITIES
20,840

 
20,636

COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 126,492,061 and 126,773,097 shares issued and outstanding
694,835

 
702,598

Retained earnings
743,528

 
790,697

Accumulated other comprehensive loss
(34,250
)
 
(4,825
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,404,113

 
1,488,470

Noncontrolling interest
73,159

 
86,681

TOTAL SHAREHOLDERS’ EQUITY
1,477,272

 
1,575,151

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,366,321

 

$2,453,115


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
Net income

$15,320

 

$57,451

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
53,826

 
56,316

Non-cash cost of land sold and real estate development costs recovered upon sale
4,938

 
5,398

Stock-based incentive compensation expense
2,588

 
5,980

Deferred income taxes
(1,322
)
 
10,103

Depreciation and amortization from discontinued operations

 
37,985

Amortization of losses from pension and postretirement plans
1,861

 
5,896

Other
944

 
(43
)
Changes in operating assets and liabilities:
 
 
 
Receivables
2,414

 
9,988

Inventories
(8,107
)
 
4,765

Accounts payable
3,874

 
27,299

Income tax receivable/payable
(321
)
 
5,217

All other operating activities
9,868

 
7,885

Expenditures for dispositions and discontinued operations

 
(5,096
)
CASH PROVIDED BY OPERATING ACTIVITIES
85,883

 
229,144

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(26,130
)
 
(33,597
)
Capital expenditures from discontinued operations

 
(47,050
)
Real estate development costs
(578
)
 
(2,595
)
Purchase of timberlands
(88,414
)
 
(74,817
)
Change in restricted cash
4,160

 
63,128

Other
3,689

 
(478
)
CASH USED FOR INVESTING ACTIVITIES
(107,273
)
 
(95,409
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
59,100

 
1,238,389

Repayment of debt
(31,472
)
 
(1,107,062
)
Dividends paid
(63,421
)
 
(124,628
)
Proceeds from the issuance of common shares
718

 
3,347

Repurchase of common shares
(9,057
)
 
(1,834
)
Debt issuance costs

 
(12,380
)
Net cash disbursed upon spin-off of Performance Fibers business

 
(106,420
)
Other

 
(680
)
CASH USED FOR FINANCING ACTIVITIES
(44,132
)
 
(111,268
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
(4,404
)
 
(50
)
CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
(69,926
)
 
22,417

Balance, beginning of year
161,558

 
199,644

Balance, end of period

$91,632

 

$222,061

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

$15,303

 

$26,980

Income taxes
270

 
10,417

Non-cash investing activity:
 
 
 
Capital assets purchased on account
2,396

 
11,547

 
 
 
 
 
(a)
Interest paid is presented net of patronage refunds received of $1.3 million for the six months ended June 30, 2015 and $2.1 million for the six months ended June 30, 2014. For additional information on patronage refunds, see Note 13 Debt in the 2014 Form 10-K.
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 (the “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, 2014, as filed with the SEC (the “2014 Form 10-K”).
Reclassifications
Certain 2014 amounts have been reclassified to conform to the current presentation, including changes in balance sheet presentation. During the first quarter of 2015, the Company reclassified seeds and seedlings from Inventory and Other Assets to Timber and Timberlands, Net to better reflect the intended use of the assets. Rayonier also reclassified long-term higher and better use (“HBU”) timberlands and real estate development costs from Other Assets to a separate balance sheet caption. These adjustments are reflected in the June 30, 2015 and December 31, 2014 Consolidated Balance Sheets. Corresponding changes have also been made to the Consolidated Statements of Cash Flows for both periods presented.
Certain 2014 amounts have also been adjusted for reclassification of discontinued operations. Rayonier completed the spin-off of its Performance Fibers business on June 27, 2014. Accordingly, the operating results of this business segment are reported as discontinued operations in the Company’s Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the prior-year period. Certain administrative and general costs historically allocated to the Performance Fibers business that remained with Rayonier are reported in continuing operations.
The Consolidated Statement of Cash Flow for the six months ended June 30, 2014 has not been restated to exclude Performance Fibers cash flows.
See Note 2Discontinued Operations for additional information regarding the spin-off of the Performance Fibers 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 that 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. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, with an option for organizations to adopt early based on the original effective date. This standard will be effective for Rayonier beginning January 1, 2018 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 2015, the FASB issued ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-30) — Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires that debt issuance costs be presented in the Balance Sheet as a direct deduction from the carrying amount of the debt liability. ASU No. 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, and is required to be applied on a retrospective basis. Early adoption is permitted. Rayonier intends to adopt ASU No. 2015-03 in the Company’s first quarter 2016 Form 10-Q filing and does not expect adoption to have a material impact on the consolidated financial statements.

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

     In May 2015, the FASB issued ASU No. 2015–07, “Fair Value Measurement (Topic 820) — Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU No. 2015–07 requires that investments for which the fair value is measured at NAV using the practical expedient (investments in funds measured at NAV) under “Fair Value Measurements and Disclosures” (Topic 820) be excluded from the fair value hierarchy. ASU No. 2015–07 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. ASU No. 2015–07 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Early adoption is permitted. Rayonier intends to adopt ASU No. 2015–07 in the Company’s first quarter 2016 Form 10-Q filing and does not expect adoption to have a material impact on the consolidated financial statements.
Subsequent Events
Quarterly Dividend
On July 20, 2015, the Company announced a third quarter dividend of 25 cents per share payable September 30, 2015, to shareholders of record on September 16, 2015.
Debt Refinancing and Recapitalization of New Zealand JV
See Note 15Debt for discussion of debt refinancing and planned recapitalization of the Company’s New Zealand joint venture.

2.
DISCONTINUED OPERATIONS
Spin-Off of the Performance Fibers Business
On June 27, 2014, Rayonier completed the tax-free spin-off of its Performance Fibers business and retained its timber, real estate and trading businesses. 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 Inc. (“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. Pursuant to the terms of the Internal Revenue Service spin-off ruling, $75 million of this cash was paid to Rayonier’s shareholders as dividends. Of this $75 million, $63.2 million was paid to shareholders as a special dividend in the third quarter of 2014.
In order to effect the spin-off and govern the Company’s relationship with Rayonier Advanced Materials after the spin-off, Rayonier and Rayonier Advanced Materials entered into a Separation and Distribution Agreement, an Intellectual Property Agreement, a Tax Sharing Agreement, an Employee Matters Agreement and a Transition Services Agreement. See Note 3 — Discontinued Operations in the 2014 Form 10-K for further details concerning these agreements.
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 disclosed as a separate reportable segment, are classified as discontinued operations in the Company's Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for all periods presented. Certain administrative and general costs historically allocated to the Performance Fibers segment are reported in continuing operations, as required.

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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 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, as presented in "Income from discontinued operations, net" in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income:
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
Sales

$212,680

 

$456,180

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

 
64,323

Income tax expense
(5,966
)
 
(21,231
)
Income from discontinued operations, net

$12,084

 

$43,092


In accordance with Accounting Standards Codification (“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 Timber 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:
 
Three Months Ended
June 30, 2014
 
Six Months Ended
June 30, 2014
Interest expense allocated to the Performance Fibers business

($1,910
)
 

($4,205
)
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, 2014
 
Six Months Ended
June 30, 2014
Depreciation and amortization

$17,336

 

$37,985

Capital expenditures
29,880

 
47,050

    
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, 2014
 
Six Months Ended
June 30, 2014
Hardwood purchases

$1,190

 

$3,935



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

3.
(LOSS) EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted (loss) earnings per common share:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
(Loss) income from continuing operations

($2,860
)
 

$4,024

 

$15,320

 

$14,359

Less: Net (loss) from continuing operations attributable to noncontrolling interest
(1,324
)
 
(245
)
 
(891
)
 
(328
)
(Loss) income from continuing operations attributable to Rayonier Inc.

($1,536
)
 

$4,269

 

$16,211

 

$14,687

 
 
 
 
 
 
 
 
Income from discontinued operations, net, attributable to Rayonier Inc.

 

$12,084

 

 
43,092

 
 
 
 
 
 
 
 
Net (loss) income attributable to Rayonier Inc.

($1,536
)
 

$16,353

 

$16,211

 

$57,779

 
 
 
 
 
 
 
 
Shares used for determining basic (loss) earnings per common share
126,635,710

 
126,434,376

 
126,625,081

 
126,390,891

Dilutive effect of:
 
 
 
 
 
 
 
Stock options

 
293,213

 
146,754

 
296,768

Performance and restricted shares

 
201,956

 
30,515

 
194,995

Assumed conversion of Senior Exchangeable Notes (a)

 
2,631,514

 
702,301

 
2,579,402

Assumed conversion of warrants (a)

 
2,738,606

 

 
2,656,633

Shares used for determining diluted (loss) earnings per common share
126,635,710

 
132,299,665

 
127,504,651

 
132,118,689

Basic (loss) earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations

($0.01
)
 

$0.03

 

$0.13

 

$0.12

Discontinued operations

 
0.10

 

 
0.34

Net (loss) income

($0.01
)
 

$0.13

 

$0.13

 

$0.46

Diluted (loss) earnings per common share attributable to Rayonier Inc.:
 
 
 
 
 
 
 
Continuing operations

($0.01
)
 

$0.03

 

$0.13

 

$0.11

Discontinued operations

 
0.09

 

 
0.33

Net (loss) income

($0.01
)
 

$0.12

 

$0.13

 

$0.44


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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Anti-dilutive shares excluded from the computations of diluted (loss) earnings per share:
 
 
 
 
 
 
 
Stock options, performance and restricted shares (b)
158,191

 
507,044

 
937,236

 
499,193

Assumed conversion of exchangeable note hedges (a)

 
2,631,514

 
702,301

 
2,579,402

Assumed conversion of Senior Exchangeable Notes due 2015 (b)
501,189

 

 

 

Total
659,380

 
3,138,558

 
1,639,537

 
3,078,595

 
 
 
 
 
(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. ASC 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. The full dilutive effect of the 2015 Notes was included for all periods presented, except for second quarter 2015 due to the loss incurred in that period.
Rayonier will distribute additional shares upon maturity of the warrants sold in conjunction with the 2015 Notes if the stock price exceeds $28.11 per share. The exchange price on the warrants is lower than periods prior to second quarter 2014 as it has been adjusted to reflect the spin-off of the Performance Fibers business. The warrants were not dilutive for the three and six months ended June 30, 2015 as the average stock price for these periods did not exceed the strike price. For further information, see Note 13 — Debt in the 2014 Form 10-K and Note 15Debt of this Form 10-Q.
(b)    For the three months ended June 30, 2015, the assumed conversion of the 2015 Notes, as well as incremental shares related to stock options, performance shares, and restricted shares, were not included in the computation of diluted loss per share as their inclusion would have an anti-dilutive effect.

4.     INCOME TAXES
The operations conducted by the Company’s real estate investment trust (“REIT”) entities are generally not subject to U.S. federal and state income taxation. Non-REIT qualifying operations are conducted by the Company’s taxable REIT subsidiaries. Prior to the June 27, 2014 spin-off of Rayonier Advanced Materials, the Company’s taxable REIT subsidiaries (“TRS”) operations included the Performance Fibers business. As such, during 2014 and prior periods the income tax benefit from continuing operations was significantly impacted by the TRS businesses. Subsequent to the spin-off, the primary businesses performed in Rayonier’s taxable REIT subsidiaries include log trading and certain real estate activities, such as the sale and entitlement of development HBU properties.
Provision for Income Taxes from Continuing Operations
The Company’s effective tax rate is below the 35 percent U.S. statutory rate due to tax benefits associated with being a REIT. The income tax benefit for the three and six months ended June 30, 2015 is principally related to the Matariki Forestry Group joint venture (the “New Zealand JV”). The prior year period’s benefit was due to losses at Rayonier's taxable operations primarily from interest and general administrative expenses not allowed to be allocated to the discontinued operations of the Performance Fibers business and is not comparable to the current year.

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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 table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented:
 
Three Months Ended June 30,
 
2015
 
2014
Income tax (benefit) expense at federal statutory rate

($1,105
)
 
35.0
 %
 

$6,153

 
35.0
 %
REIT income and taxable losses
1,077

 
(34.1
)
 
(5,625
)
 
(32.0
)
Foreign operations
101

 
(3.2
)
 
(728
)
 
(4.1
)
Net operating loss valuation allowance
(216
)
 
6.9

 

 

Non-deductible real estate losses

 

 
590

 
3.4

Other
(153
)
 
4.8

 
119

 
0.6

Income tax (benefit) expense before discrete items

($296
)
 
9.4
 %
 

$509

 
2.9
 %
CBPC valuation allowance

 

 
15,574

 
88.7

Spin-off related costs

 

 
797

 
4.5

Deferred tax inventory valuations

 

 
(3,293
)
 
(18.7
)
Other

 

 
(31
)
 
(0.3
)
Income tax (benefit) expense as reported for continuing operations

($296
)
 
9.4
 %
 

$13,556

 
77.1
 %
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2015
 
2014
Income tax expense at federal statutory rate

$5,093

 
35.0
 %
 

$7,112

 
35.0
 %
REIT income and taxable losses
(6,894
)
 
(47.4
)
 
(13,823
)
 
(69.3
)
Foreign operations
(645
)
 
(4.4
)
 
(841
)
 
(0.3
)
Net operating loss valuation allowance
1,386

 
9.5

 

 

Non-deductible real estate losses

 

 
681

 
1.2

Other
292

 
2.0

 
138

 
0.3

Income tax benefit before discrete items

($768
)
 
(5.3
)%
 

($6,733
)
 
(33.1
)%
CBPC valuation allowance

 

 
15,574

 
76.6

Spin-off related costs

 

 
797

 
3.9

Deferred tax inventory valuations

 

 
(3,293
)
 
(16.2
)
Other

 

 
(384
)
 
(1.9
)
Income tax (benefit) expense as reported for continuing operations

($768
)
 
(5.3
)%
 

$5,961

 
29.3
 %
Provision for Income Taxes from Discontinued Operations
On June 27, 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. See Note 2Discontinued Operations for additional information on the spin-off of the Performance Fibers business.


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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)

5.     HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT COSTS

Rayonier continuously assesses potential alternative uses of its timberlands, as some properties may become more valuable for development, residential, recreation or other purposes. The Company periodically transfers, via a sale or contribution from the REIT to TRS, HBU timberlands to enable land-use entitlement, development or marketing activities. The Company also acquires HBU properties in connection with timberland acquisitions. These properties are managed as timberlands until sold or developed. While the majority of HBU sales involve rural and recreational land, the Company also selectively pursues various land-use entitlements on certain properties for residential, commercial and industrial development in order to enhance the long-term value of such properties. For selected development properties, Rayonier also invests in targeted infrastructure improvements, such as roadways and utilities, to accelerate the marketability and improve the value of such properties.
An analysis of higher and better use timberlands and real estate development costs from December 31, 2014 to June 30, 2015 is shown below:
 
Higher and Better Use Timberlands and Real Estate Development Costs
 
Land and Timber
 
Development Costs
 
Total
Non-current portion at December 31, 2014

$65,959

 

$11,474

 

$77,433

Plus: Current portion (a)
4,875

 
57

 
4,932

Total Balance at December 31, 2014
70,834

 
11,531

 
82,365

Non-cash cost of land sold and real estate development costs recovered upon sale

(4,205
)
 
(57
)
 
(4,262
)
Timber depletion from harvesting activities and basis of timber sold in real estate sales

(1,340
)
 

 
(1,340
)
Capitalized real estate development costs (b)

 
926

 
926

Capital expenditures (silviculture)
100

 

 
100

Acquisitions

 

 

Transfers

 

 

Other

 
(28
)
 
(28
)
Total Balance at June 30, 2015
65,389

 
12,372

 
77,761

Less: Current portion (a)
(7,488
)
 
(547
)
 
(8,035
)
Non-current portion at June 30, 2015

$57,901

 

$11,825

 

$69,726

 
 
 
 
 
(a)
The current portion of Higher and Better Use Timberlands and Real Estate Development Costs is recorded in Inventory. See Note 14Inventory for additional information.
(b)
Capitalized real estate development costs for the six months ended June 30, 2015 of $926,000 consisted of $578,000 in cash outflows and a $348,000 change in accrued spending.

6.
RESTRICTED DEPOSITS
In order to qualify for like-kind exchange (“LKE”) treatment, the proceeds from real estate sales must be deposited with a third-party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of June 30, 2015 and December 31, 2014, the Company had $2.5 million and $6.7 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)

7.
SHAREHOLDERS’ EQUITY
 An analysis of shareholders’ equity for the six months ended June 30, 2015 and the year ended December 31, 2014 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 (a)
 
Amount
 
Balance, December 31, 2013
126,257,870

 

$692,100

 

$1,015,209

 

($46,139
)
 

$94,073

 

$1,755,243

Net income (loss)

 

 
99,337

 

 
(1,491
)
 
97,846

Dividends ($2.03 per share)

 

 
(256,861
)
 

 

 
(256,861
)
Contribution to Rayonier Advanced Materials

 
(301
)
 
(61,318
)
 
80,749

 

 
19,130

Adjustments to Rayonier Advanced Materials (b)

 

 
(5,670
)
 
(2,556
)
 

 
(8,226
)
Issuance of shares under incentive stock plans
561,701

 
5,579

 

 

 

 
5,579

Stock-based compensation

 
7,869

 

 

 

 
7,869

Tax deficiency on stock-based compensation

 
(791
)
 

 

 

 
(791
)
Repurchase of common shares
(46,474
)
 
(1,858
)
 

 

 

 
(1,858
)
Net loss from pension and postretirement plans

 

 

 
(24,147
)
 

 
(24,147
)
Noncontrolling interest redemption of shares

 

 

 

 
(931
)
 
(931
)
Foreign currency translation adjustment

 

 

 
(11,526
)
 
(4,321
)
 
(15,847
)
Joint venture cash flow hedges

 

 

 
(1,206
)
 
(649
)
 
(1,855
)
Balance, December 31, 2014
126,773,097

 

$702,598

 

$790,697

 

($4,825
)
 

$86,681

 

$1,575,151

Net income (loss)

 

 
16,211

 

 
(891
)
 
15,320

Dividends ($0.50 per share)

 

 
(63,380
)
 

 

 
(63,380
)
Issuance of shares under incentive stock plans
134,448

 
718

 

 

 

 
718

Stock-based compensation

 
2,588

 

 

 

 
2,588

Tax deficiency on stock-based compensation

 
(272
)
 

 

 

 
(272
)
Repurchase of common shares (c) (d)
(415,484
)
 
(10,797
)
 

 

 

 
(10,797
)
Net gain from pension and postretirement plans

 

 

 
1,524

 

 
1,524

Foreign currency translation adjustment

 

 

 
(28,438
)
 
(11,279
)
 
(39,717
)
Joint venture cash flow hedges

 

 

 
(2,511
)
 
(1,352
)
 
(3,863
)
Balance, June 30, 2015
126,492,061

 

$694,835

 

$743,528

 

($34,250
)
 

$73,159

 

$1,477,272

 
 
 
 
 
 
(a)
The Company’s common shares are registered in North Carolina and have a $0.00 par value.
(b)
Primarily relates to adjustments made to the Rayonier Advanced Materials contribution as income taxes and pension and postretirement plan assets and obligations were finalized.
(c)
During the second quarter the Company repurchased approximately $10.7 million of common stock at an average price of $25.94 per share. As of June 30, 2015, the Company had 126.5 million shares of common stock outstanding and $89.3 million remaining in its share repurchase authorization announced in June 2015.
(d)
Includes shares of the Company’s common stock purchased from employees in non-open market transactions. The shares of stock were sold by current and former employees of the Company in exchange for cash that was used to pay withholding taxes associated with the vesting of restricted stock awards under the Company’s stock incentive plan. The price per share surrendered is based on the closing price of the company’s stock on the respective vesting dates of the awards.
8.
SEGMENT AND GEOGRAPHICAL INFORMATION
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. Effective with the fourth quarter of 2014, the Company realigned its segments considering the economic characteristics of each business unit and the way management internally evaluates business performance and makes capital allocation decisions. All prior period amounts have been reclassified to reflect the newly realigned segment structure. See Item 2 — Management’s Discussion and Analysis of Financial Condition Our Company and Results of Operations for additional information.
Sales between operating segments are made based on estimated fair market value. Intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on segment operating income and Adjusted EBITDA. Asset information is not reported by segment, as the company does not produce asset information by segment internally.
Operating income as presented in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income is equal to segment income. Certain income (loss) items in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) 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.
Segment information for the three and six months ended June 30, 2015 and 2014 were as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
SALES
2015
 
2014
 
2015
 
2014
Southern Timber

$32,681

 

$31,525

 

$68,212

 

$65,402

Pacific Northwest Timber
17,102

 
25,053

 
36,256

 
58,090

New Zealand Timber
39,223

 
44,543

 
80,417

 
82,307

Real Estate
6,945

 
34,017

 
30,736

 
39,547

Trading
19,850

 
29,224

 
40,485

 
64,910

Intersegment Eliminations

 
(1,217
)
 

 
(3,924
)
Total

$115,801

 

$163,145

 

$256,106

 

$306,332

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
OPERATING INCOME
2015
 
2014
 
2015
 
2014
Southern Timber

$11,777

 

$8,886

 

$24,190

 

$19,379

Pacific Northwest Timber
1,687

 
8,785

 
4,275

 
21,427

New Zealand Timber
(945
)
 
2,249

 
4,749

 
4,660

Real Estate
1,421

 
27,764

 
14,003

 
28,489

Trading
(84
)
 
(132
)
 
186

 
(544
)
Corporate and other
(7,333
)
 
(9,975
)
 
(13,133
)
 
(21,408
)
Total Operating Income

$6,523

 

$37,577

 
34,270

 
52,003

Unallocated interest expense and other
(9,679
)
 

($19,997
)
 
(19,718
)
 
(31,683
)
Total (loss) income from continuing operations before income taxes

($3,156
)
 

$17,580

 

$14,552

 

$20,320


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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2015
 
2014
 
2015
 
2014
Southern Timber

$12,650

 

$10,709

 

$26,951

 

$22,705

Pacific Northwest Timber
2,941

 
5,194

 
6,731

 
11,492

New Zealand Timber
7,183

 
7,669

 
15,186

 
14,163

Real Estate
1,006

 
6,422

 
4,818

 
7,333

Trading

 

 

 

Corporate and other
70

 
341

 
140

 
623

Total

$23,850

 

$30,335

 

$53,826

 

$56,316

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
NON-CASH COST OF LAND SOLD AND REAL ESTATE COSTS RECOVERED UPON SALE
2015
 
2014
 
2015
 
2014
Southern Timber

 

 

 

Pacific Northwest Timber

 

 

 

New Zealand Timber

 
(2
)
 

 
2,096

Real Estate
1,191

 
2,324

 
4,938

 
3,302

Trading

 

 

 

Corporate and other

 

 

 

Total

$1,191

 

$2,322

 

$4,938

 

$5,398


9.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company’s New Zealand JV uses derivative financial instruments to mitigate the financial impact of exposure to these risks. The Company also uses derivative financial instruments to mitigate exposure to foreign currency risk due to the translation of the investment in Rayonier’s New Zealand-based operations from New Zealand dollars to U.S. dollars.
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. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in New Zealand is partially or completely liquidated. 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 Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited (“RNZ”) and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The timber operations of the New Zealand JV are typically hedged 50 percent to 90 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50 percent to 75 percent of forecasted sales and purchases for the forward three to 12 months and up to 50 percent of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of June 30, 2015, foreign currency exchange contracts and foreign currency option contracts had maturity dates through December 2016.

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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)

Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments that were entered into subsequent to the Company’s acquisition of a majority interest in the New Zealand JV qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
In December 2014, the Company entered into a foreign currency exchange contract to mitigate the risk of fluctuations in foreign currency exchange rates when translating RNZ’s balance sheet to U.S. dollars. This contract hedges a portion of the Company’s net investment in New Zealand and qualifies as a net investment hedge. The fair value of the foreign currency exchange contract 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 ineffectiveness of the foreign currency exchange contract is measured using the spot rate method, whereby the change in the fair value of the contract, other than the change attributable to movements in the spot rate, is excluded from the measure of hedge ineffectiveness and is reported directly in earnings. The Company does not expect any ineffectiveness or changes other than those attributable to movements in the spot rate as the critical risks of the forward contract and the net investment in RNZ coincide. This foreign currency exchange contract matures on December 21, 2015.
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, 2015, the Company’s interest rate contracts hedged 81 percent of the New Zealand JV’s variable rate debt and had maturity dates through January 2020.
See Note 15Debt for discussion of debt refinancing and planned recapitalization of the Company’s New Zealand joint venture subsequent to June 30, 2015.
Fuel Hedge Contracts
The Company has historically used fuel hedge contracts to manage its New Zealand JV’s exposure to changes in New Zealand’s domestic diesel prices. Due to the low volume of diesel fuel purchases made by the New Zealand JV in 2013, the Company decided to no longer hedge its diesel fuel purchases effective November 2013. There were no contracts remaining as of December 31, 2014.    
The following table demonstrates the impact of the Company’s derivatives on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the six months ended June 30, 2015 and 2014.
 
 
 
Three Months Ended
June 30,
 
Income Statement Location
 
2015
 
2014
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive (loss) income
 

($1,621
)
 

($818
)
Foreign currency option contracts
Other comprehensive (loss) income
 
(2,658
)
 
(504
)
 
 
 
 
 
 
Derivative designated as a net investment hedge:
 
 
 
 
 
Foreign currency exchange contract
Other comprehensive (loss) income
 

$2,173

 

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

 

Foreign currency option contracts
Other operating (income) expense
 
546

 

Interest rate swaps
Interest income and miscellaneous expense, net
 
(1,417
)
 
(729
)
Fuel hedge contracts
Cost of sales (benefit)
 

 
(92
)
 
 
 
 
 
 

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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)


 
 
 
Six Months Ended
June 30,
 
Income Statement Location
 
2015
 
2014
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive (loss) income
 

($2,308
)
 

$669

Foreign currency option contracts
Other comprehensive (loss) income
 
(3,339
)
 
221

 
 
 
 
 
 
Derivative designated as a net investment hedge:
 
 
 
 
 
Foreign currency exchange contract
Other comprehensive (loss) income
 
3,107

 

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

 
25

Foreign currency option contracts
Other operating (income) expense
 
546

 
7

Interest rate swaps
Interest and miscellaneous (expense) income, net
 
(3,273
)
 
(1,862
)
Fuel hedge contracts
Cost of sales (benefit)
 

 
225

During the next 12 months, the amount of the June 30, 2015 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 $4.1 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount
 
June 30, 2015
 
December 31, 2014
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$28,200

 

$28,540

Foreign currency option contracts
135,700

 
79,400

 
 
 
 
Derivative designated as a net investment hedge:
 
 
 
Foreign currency exchange contract
23,828

 
27,419

 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
129,352

 
161,968


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

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Location on Balance Sheet
 
Fair Value Assets / (Liabilities) (a)
 
 
 
June 30, 2015
 
December 31, 2014
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Prepaid and other current assets
 

 

$132

 
Other assets
 

 
59

 
Other current liabilities
 
(2,197
)
 
(272
)
 
Other non-current liabilities
 
(639
)
 

Foreign currency option contracts
Prepaid and other current assets
 

 
299

 
Other assets
 

 
198

 
Other current liabilities
 
(3,614
)
 
(1,439
)
 
Other non-current liabilities
 
(653
)
 
(196
)
 
 
 
 
 
 
Derivative designated as a net investment hedge:
 
 
 
 
Foreign currency exchange contract
Prepaid and other current assets
 
2,884

 

 
Other current liabilities
 

 
(223
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Interest rate swaps
Other non-current liabilities
 
(8,271
)
 
(7,247
)
 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Prepaid and other current assets
 
 

$2,884

 

$431

Other assets
 
 

 
257

Total derivative assets
 
 
2,884

 
688

 
 
 
 
 
 
Other current liabilities
 
 
(5,811
)
 
(1,934
)
Other non-current liabilities
 
 
(9,563
)
 
(7,443
)
Total derivative liabilities
 
 

($15,374
)
 

($9,377
)
 
 
 
 
 
(a)
See Note 10Fair Value Measurements for further information on the fair value of the Company’s derivatives including their classification within the fair value hierarchy.

Offsetting Derivatives
Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. The Company’s derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.


15


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

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.
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at June 30, 2015 and December 31, 2014, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:
 
June 30, 2015
 
December 31, 2014
Asset (liability)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
Cash and cash equivalents

$91,632

 

$91,632

 

 

$161,558

 

$161,558

 

Restricted cash (a)
2,528

 
2,528

 

 
6,688

 
6,688

 

Current maturities of long-term debt
(30,000
)
 

 
(32,812
)
 
(129,706
)
 

 
(156,762
)
Long-term debt
(722,353
)
 

 
(725,543
)
 
(621,849
)
 

 
(628,476
)
Interest rate swaps (b)
(8,271
)
 

 
(8,271
)
 
(7,247
)
 

 
(7,247
)
Foreign currency exchange contracts (b)
48

 

 
48

 
(304
)
 

 
(304
)
Foreign currency option contracts (b)
(4,267
)
 

 
(4,267
)
 
(1,138
)
 

 
(1,138
)
 
 
 
 
 
(a)
Restricted cash is recorded in “Other Assets” and represents the proceeds from LKE sales deposited with a third-party intermediary.
(b)
See Note 9Derivative Financial Instruments and Hedging Activities for information regarding the Balance Sheet classification of the Company’s derivative financial instruments.
Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents and Restricted cashThe carrying amount is equal to fair market value.
Debt The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.
Interest rate swap agreements The fair value of interest rate contracts is determined by discounting the expected future cash flows, for each instrument, at prevailing interest rates.
Foreign currency exchange contracts The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.
Foreign currency option contracts The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.


16


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

11.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies. As of June 30, 2015, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Associated Liability
Standby letters of credit (a)
 

$16,685

 

$15,000

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
776

 

Total financial commitments
 

$19,715

 

$15,043

 
 
 
 
 
(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. These letters of credit will expire at various dates during 2015 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At June 30, 2015, the Company has a de minimis liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(c)
Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates during 2015 and 2016 and are expected to be renewed as required.
 
12.
CONTINGENCIES

Following the Company’s November 10, 2014 earnings release and filing of the restated interim financial statements for the quarterly periods ended March 31, 2014 and June 30, 2014 (the “November 2014 Announcement”), shareholders of the Company filed five putative class actions against the Company and Paul G. Boynton, Hans E. Vanden Noort, David L. Nunes, and H. Edwin Kiker arising from circumstances described in the November 2014 Announcement, entitled respectively:

Sating v. Rayonier Inc. et al, Civil Action No. 3:14-cv-01395; filed November 12, 2014 in the United States District Court for the Middle District of Florida;

Keasler v. Rayonier Inc. et al, Civil Action No. 3:14-cv-01398, filed November 13, 2014 in the United States District Court for the Middle District of Florida;

Lake Worth Firefighters’ Pension Trust Fund v. Rayonier Inc. et al, Civil Action No. 3:14-cv-01403, filed November 13, 2014 in the United States District Court for the Middle District of Florida;

Christie v. Rayonier Inc. et al, Civil Action No. 3:14-cv-01429, filed November 21, 2014 in the United States District Court for the Middle District of Florida; and

Brown v. Rayonier Inc. et al, Civil Action No. 1:14-cv-08986, initially filed in the United States District Court for the Southern District of New York and later transferred to the United States District Court for the Middle District of Florida and assigned as Civil Action No. 3:14-cv-01474.


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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)

On January 9, 2015, the five securities actions were consolidated into one putative class action entitled In re Rayonier Inc. Securities Litigation, Case No. 3:14-cv-01395-TJC-JBT, in the United States District Court for the Middle District of Florida. The plaintiffs alleged that the defendants made false and/or misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs sought unspecified monetary damages and attorneys’ fees and costs. Two shareholders, the Pension Trust Fund for Operating Engineers and the Lake Worth Firefighters’ Pension Trust Fund moved for appointment as lead plaintiff on January 12, 2015, which was granted on February 25, 2015. On April 7, 2015, the plaintiffs filed a Consolidated Class Action Complaint (the “Amended Complaint”). In the Amended Complaint, plaintiffs added allegations as to and added as a defendant N. Lynn Wilson, a former officer of Rayonier. With the filing of the Amended Complaint, David L. Nunes and H. Edwin Kiker were dropped from the case as defendants. Defendants timely filed Motions to Dismiss on May 15, 2015. The court has set a hearing on the motion for August 25, 2015. At this preliminary stage, the Company cannot determine whether there is a reasonable likelihood a material loss has been incurred nor can the range of any such loss be estimated.

On November 26, 2014, December 29, 2014, January 26, 2015, February 13, 2015, and May 12, 2015, the Company received separate letters from shareholders requesting that the Company investigate or pursue derivative claims against certain officers and directors related to the November 2014 Announcement. Although these demands do not identify any claims against the Company, the Company could potentially incur certain obligations to advance expenses and provide indemnification to certain current and former officers and directors of the Company. The Company may also incur expenses as a result of any costs arising from the investigation of the claims alleged in the various demands. At this preliminary stage, the ultimate outcome of these matters cannot be predicted, nor can the range of potential expenses the Company may incur as a result of the obligations identified above be estimated.

In November 2014, the Company received a subpoena from the SEC seeking documents related to the Company’s amended reports filed with the SEC on November 10, 2014. The Company is cooperating with the SEC and complying with the subpoena. The Company does not currently believe that the investigation will have a material impact on the Company’s financial condition, results of operations, or cash flow, but cannot predict the timing or outcome of the SEC investigation.

The Company has also been named as a defendant in various other lawsuits and claims arising in the normal course of business. While the Company has procured reasonable and customary insurance covering risks normally occurring in connection with its businesses, it has in certain cases retained some risk through the operation of self-insurance, primarily in the areas of workers’ compensation, property insurance and general liability. These pending lawsuits and claims, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flow.


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

13.
EMPLOYEE BENEFIT PLANS
The Company has one qualified non-contributory defined benefit pension plan covering a portion of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plan. Currently, the pension 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. In the first quarter of 2015, the Company lowered its return on asset assumption from 8.5 percent to 7.7 percent for 2015.
The net pension and postretirement benefit costs that have been recorded are shown in the following table:
 
Pension
Postretirement
 
Three Months Ended
June 30,
 
Three Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

$371

 

$1,544

 

$3

 

$147

Interest cost
830

 
4,452

 
13

 
199

Expected return on plan assets
(1,007
)
 
(6,330
)
 

 

Amortization of prior service cost
3

 
277

 

 
4

Amortization of losses
916

 
2,603

 
3

 
116

Amortization of negative plan amendment

 

 

 
(133
)
Net periodic benefit cost (a)

$1,113

 

$2,546

 

$19

 

$333

 
Pension
 
Postretirement
 
Six Months Ended
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

$742

 

$3,168

 

$6

 

$326

Interest cost
1,659

 
9,135

 
26

 
405

Expected return on plan assets
(2,014
)
 
(12,988
)
 

 

Amortization of prior service cost
6

 
569

 

 
8

Amortization of losses
1,849

 
5,340

 
6

 
245

Amortization of negative plan amendment

 

 

 
(267
)
Net periodic benefit cost (a)

$2,242

 

$5,224

 

$38

 

$717