10-Q
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 March 31, 2016
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 April 29, 2016, there were outstanding 122,822,111 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 INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
SALES
 

$134,843

 

$140,305

Costs and Expenses
 
 
 
 
Cost of sales
 
107,971

 
107,234

Selling and general expenses
 
9,779

 
10,898

Other operating income, net (Note 14)
 
(5,904
)
 
(5,574
)
 
 
111,846

 
112,558

OPERATING INCOME
 
22,997

 
27,747

Interest expense
 
(7,098
)
 
(8,544
)
Interest income and miscellaneous expense, net
 
(1,622
)
 
(1,494
)
INCOME BEFORE INCOME TAXES
 
14,277

 
17,709

Income tax benefit
 
781

 
471

NET INCOME
 
15,058

 
18,180

Less: Net income attributable to noncontrolling interest
 
586

 
433

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
 
14,472

 
17,747

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
Foreign currency translation adjustment, net of income tax benefit of $0 and $343
 
2,804

 
(14,323
)
Cash flow hedges, net of income tax benefit (expense) of $432 and $436
 
(13,774
)
 
(946
)
Actuarial change and amortization of pension and postretirement plans, net of income tax expense of $0 and $158
 
617

 
781

Total other comprehensive loss
 
(10,353
)
 
(14,488
)
COMPREHENSIVE INCOME
 
4,705

 
3,692

Less: Comprehensive loss attributable to noncontrolling interest
 
(3,749
)
 
(3,791
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
 

$8,454

 

$7,483

EARNINGS PER COMMON SHARE (Note 10)
 
 
 
 
Basic earnings per share attributable to Rayonier Inc.
 

$0.12

 

$0.14

Diluted earnings per share attributable to Rayonier Inc.
 

$0.12

 

$0.14

 
 
 
 
 
Dividends declared per share
 

$0.25

 

$0.25


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
March 31, 2016
 
December 31, 2015
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents

$76,204

 

$51,777

Accounts receivable, less allowance for doubtful accounts of $42 and $42
27,497

 
20,222

Inventory (Note 15)
17,443

 
15,351

Prepaid expenses
12,890

 
12,654

Other current assets
1,177

 
5,681

Total current assets
135,211

 
105,685

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,063,691

 
2,066,780

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT
     INVESTMENTS (NOTE 5)
66,618

 
65,450

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
1,833

 
1,833

Buildings
9,024

 
9,014

Machinery and equipment
3,689

 
3,686

Construction in progress
1,638

 
1,282

Total property, plant and equipment, gross
16,184

 
15,815

Less — accumulated depreciation
(9,349
)
 
(9,073
)
Total property, plant and equipment, net
6,835

 
6,742

OTHER ASSETS
59,782

 
71,281

TOTAL ASSETS

$2,332,137

 

$2,315,938

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$22,242

 

$21,479

Current maturities of long-term debt
12,211

 

Accrued taxes
4,076

 
3,685

Accrued payroll and benefits
3,317

 
7,037

Accrued interest
7,373

 
6,153

Other current liabilities
19,089

 
21,103

Total current liabilities
68,308

 
59,457

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
857,429

 
830,554

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)
34,313

 
34,137

OTHER NON-CURRENT LIABILITIES
36,307

 
30,050

COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 122,742,575 and 122,770,217 shares issued and outstanding
704,174

 
708,827

Retained earnings
595,851

 
612,760

Accumulated other comprehensive loss
(43,581
)
 
(33,503
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,256,444

 
1,288,084

Noncontrolling interest
79,336

 
73,656

TOTAL SHAREHOLDERS’ EQUITY
1,335,780

 
1,361,740

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,332,137

 

$2,315,938


See Notes to Consolidated Financial Statements.

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Table of Contents




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


 
Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Non-controlling Interest
 
Shareholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2014
126,773,097

 

$702,598

 

$790,697

 

($4,825
)
 

$86,681

 

$1,575,151

Net income (loss)

 

 
46,165

 

 
(2,224
)
 
43,941

Dividends ($1.00 per share)

 

 
(124,943
)
 

 

 
(124,943
)
Issuance of shares under incentive stock plans
205,219

 
2,117

 

 

 

 
2,117

Stock-based compensation

 
4,484

 

 

 

 
4,484

Tax deficiency on stock-based compensation

 
(250
)
 

 

 

 
(250
)
Repurchase of common shares
(4,208,099
)
 
(122
)
 
(100,000
)
 

 

 
(100,122
)
Net gain from pension and postretirement plans

 

 

 
2,933

 

 
2,933

Adjustments to Rayonier Advanced Materials

 

 
841

 

 

 
841

Foreign currency translation adjustment

 

 

 
(21,567
)
 
(10,884
)
 
(32,451
)
Cash flow hedges

 

 

 
(10,044
)
 
83

 
(9,961
)
Balance, December 31, 2015
122,770,217

 

$708,827

 

$612,760

 

($33,503
)
 

$73,656

 

$1,361,740

Net income

 

 
14,472

 

 
586

 
15,058

Dividends ($0.25 per share)

 

 
(30,691
)
 

 

 
(30,691
)
Issuance of shares under incentive stock plans
11,232

 
18

 

 

 

 
18

Stock-based compensation

 
839

 

 

 

 
839

Repurchase of common shares
(38,874
)
 
(16
)
 
(690
)
 

 

 
(706
)
Actuarial change and amortization of pension and postretirement plan liabilities

 

 

 
617

 

 
617

Foreign currency translation adjustment

 

 

 
(210
)
 
3,014

 
2,804

Cash flow hedges

 


 

 
(13,923
)
 
149

 
(13,774
)
Recapitalization of New Zealand Joint Venture

 
(5,398
)
 

 
3,438

 
1,960

 

Recapitalization costs

 
(96
)
 

 

 
(28
)
 
(124
)
Balance, March 31, 2016
122,742,575

 

$704,174

 

$595,851

 

($43,581
)
 

$79,336

 

$1,335,780


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)
 
Three Months Ended March 31,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income

$15,058

 

$18,180

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
29,342

 
29,975

Non-cash cost of land and improved development
4,108

 
3,747

Stock-based incentive compensation expense
839

 
805

Deferred income taxes
(545
)
 
(189
)
Amortization of losses from pension and postretirement plans
617

 
939

Other
(1,081
)
 
40

Changes in operating assets and liabilities:
 
 
 
Receivables
(6,904
)
 
3,544

Inventories
(4,619
)
 
(3,133
)
Accounts payable
1,369

 
2,857

Income tax receivable/payable
(98
)
 
(150
)
All other operating activities
(7,051
)
 
(3,217
)
CASH PROVIDED BY OPERATING ACTIVITIES
31,035

 
53,398

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(13,298
)
 
(13,164
)
Real estate development investments
(1,685
)
 
(276
)
Purchase of timberlands
(14,323
)
 
(23,070
)
Change in restricted cash
10,613

 
(7,071
)
Other
(1,590
)
 
(158
)
CASH USED FOR INVESTING ACTIVITIES
(20,283
)
 
(43,739
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
285,552

 
12,000

Repayment of debt
(240,752
)
 
(11,371
)
Dividends paid
(30,675
)
 
(31,667
)
Proceeds from the issuance of common shares
18

 
546

Repurchase of common shares made under share repurchase program
(690
)
 

Other
(16
)
 
(94
)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
13,437

 
(30,586
)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
238

 
(1,582
)
CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
24,427

 
(22,509
)
Balance, beginning of year
51,777

 
161,558

Balance, end of period

$76,204

 

$139,049

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

$5,808

 

$5,016

Income taxes
119

 
138

Non-cash investing activity:
 
 
 
Capital assets purchased on account
2,725

 
2,441

 
 
 
 
 
(a)
Interest paid is presented net of patronage refunds received of $0.4 million and $1.3 million for the three months ended March 31, 2016 and March 31, 2015, respectively. For additional information on patronage refunds, see Note 5 Debt in the 2015 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, 2015, as filed with the SEC (the “2015 Form 10-K”).
Reclassifications
Certain 2015 amounts have been reclassified to conform with the current year presentation, including changes in balance sheet presentation. During the first quarter of 2016, the Company reclassified capitalized debt costs related to non-revolving debt from Other Assets to Long Term Debt as a result of the adoption of ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-50) - Simplifying the Presentation of Debt Issuance Costs, which is required to be applied on a retrospective basis. This reclassification is reflected in the March 31, 2016 and December 31, 2015 Consolidated Balance Sheets. A corresponding change has also been made to the Consolidated Statement of Cash Flows for both periods presented.
New Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016 , and interim periods within those annual periods. Rayonier intends to adopt ASU No. 2016-09 in the Company’s first quarter 2017 Form 10-Q. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU No. 2016-05 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Rayonier intends to adopt ASU No. 2016-05 in the Company’s first quarter 2017 Form 10-Q filing, which the Company does not expect will have an impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. ASU No. 2016-02 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance 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 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that will supersede current revenue recognition guidance. 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 August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date. ASU No. 2015-14 provides 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.  In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing. The new standard clarifies the guidance for identifying performance obligations. 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 and has completed a preliminary analysis of the specific impacts to our New Zealand Timber segment.

Subsequent Events
Menasha Acquisition
On April 29, 2016, the Company, jointly with Forest Investment Associates (“FIA”) on behalf of funds it manages, completed an acquisition of all the outstanding common stock of Menasha Forest Products Corporation (“Menasha”), a privately held company with approximately 132,000 acres of timberland located in Oregon and Washington (the “Menasha Acquisition”). In a subsequent transaction that is expected to close in the second quarter, the Menasha timberland will be distributed to various entities, ultimately resulting in Rayonier owning an identified portfolio of 61,000 acres of the Menasha timberland for a final purchase price of approximately $263 million. As of the filing date of this report the Company has not completed its initial accounting related to this acquisition. Accordingly, certain disclosures required by ASC 805 Business Combinations will be included upon the Company’s completion of such assessment in the second quarter and will be included in its respective Form 10-Q Report.
Disposition of 55,000 acres of Pacific Northwest timberland
On April 28, 2016, the Company completed its disposition of approximately 55,000 acres located in Washington to FIA (the “Washington disposition”) for a sales price of approximately $130 million. The proceeds received from the disposition were used to finance the Company’s portion of the Menasha Acquisition.
Incremental Term Loan
On April 28, 2016, the Company entered into an Incremental Term Loan Agreement with CoBank, ACB, as administrative agent, and a syndicate of Farm Credit institutions to provide a 10-year, $300 million incremental term loan. Proceeds from the new term loan were used to fund Rayonier’s portion of the Menasha transaction net of the proceeds received from the Washington disposition (approximately $130 million), to repay approximately $105 million outstanding on the company’s revolving credit facility and will also be used for general corporate purposes.

2.
JOINT VENTURE INVESTMENT
Matariki Forestry Group
On March 3, 2016 (the "contribution date"), the Company made a capital contribution into Matariki Forestry Group (the "New Zealand JV"), a joint venture that owns or leases approximately 0.4 million legal acres of New Zealand timberlands, for the purpose of refinancing approximately NZ$235 million of New Zealand JV indebtedness and paying related fees and expenses, including the costs of settling out-of-the-money interest rate swaps.  As a result of the capital contribution, the Company's ownership interest in the New Zealand JV increased from 65% to 77%. As a result of the increase in ownership percentage, the pro-rata share of the New Zealand JV’s unrealized foreign currency and cash flow hedge losses were reallocated between the Company and the noncontrolling interest. In accordance with ASC 810-10-45-24, this reallocation resulted in a reduction to the common share balance.  The Company maintains a controlling financial interest in the New Zealand JV and accordingly, consolidates the New Zealand JV’s Balance Sheet and results of operations. The portions of the consolidated financial position and results of operations attributable to the New Zealand JV’s 23% noncontrolling interest are shown separately within the Consolidated Statement of Income and Comprehensive Income and Consolidated Statement of Shareholders’ Equity. Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the New Zealand JV.


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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.
SEGMENT AND GEOGRAPHICAL INFORMATION
Sales between operating segments are made based on estimated fair market value and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on segment operating income and Adjusted EBITDA. Asset information is not reported by segment, as the company does not produce asset information by segment internally.
Operating income as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income. Certain income (loss) items in the Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations and are included under “Corporate and other.”
Segment information for the three months ended March 31, 2016 and 2015 were as follows:
 
Three Months Ended
March 31,
SALES
2016
 
2015
Southern Timber

$44,740

 

$35,531

Pacific Northwest Timber
19,309

 
19,154

New Zealand Timber
36,023

 
41,194

Real Estate
13,363

 
23,791

Trading
21,408

 
20,635

Total

$134,843

 

$140,305

 
Three Months Ended
March 31,
OPERATING INCOME
2016
 
2015
Southern Timber

$15,753

 

$12,413

Pacific Northwest Timber
1,385

 
2,587

New Zealand Timber
4,744

 
5,694

Real Estate
4,225

 
12,582

Trading
350

 
270

Corporate and other
(3,460
)
 
(5,799
)
Total Operating Income
22,997

 
27,747

Unallocated interest expense and other
(8,720
)
 
(10,038
)
Total Income before Income Taxes

$14,277

 

$17,709

 
Three Months Ended
March 31,
DEPRECIATION, DEPLETION AND AMORTIZATION
2016
 
2015
Southern Timber

$16,556

 

$14,301

Pacific Northwest Timber
4,639

 
3,790

New Zealand Timber
4,860

 
8,003

Real Estate
3,203

 
3,812

Trading

 

Corporate and other
84

 
69

Total

$29,342

 

$29,975


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

 
Three Months Ended
March 31,
NON-CASH COST OF LAND AND IMPROVED DEVELOPMENT
2016
 
2015
Southern Timber

 

Pacific Northwest Timber

 

New Zealand Timber
1,824

 

Real Estate
2,284

 
3,747

Trading

 

Corporate and other

 

Total

$4,108

 

$3,747


4.
DEBT
Rayonier’s debt consisted of the following at March 31, 2016:
 
March 31, 2016
Senior Notes due 2022 at a fixed interest rate of 3.75%

$325,000

Term Credit Agreement borrowings due 2024 at a variable interest rate of 2.1% at March 31, 2016
350,000

Revolving Credit Facility borrowings due 2020 at a variable interest rate of 1.7% at March 31, 2016
105,000

Mortgage notes due 2017 at fixed interest rates of 4.35%
42,537

Solid waste bond due 2020 at a variable interest rate of 1.7% at March 31, 2016
15,000

New Zealand JV Working Capital Facility due 2016 at a variable interest rate of 3.2% at March 31, 2016
12,211

New Zealand JV noncontrolling interest shareholder loan at 0% interest rate
23,095

Total debt
872,843

Less: Current maturities of long-term debt
(12,211
)
Less: Deferred financing costs
(3,203
)
Long-term debt, net of deferred financing costs

$857,429

Principal payments due during the next five years and thereafter are as follows:
2016

$12,211

2017 (a)
42,000

2018

2019

2020
120,000

Thereafter
698,095

Total Debt

$872,306

 
 
 
 
 
(a)
The mortgage notes due in 2017 were recorded at a premium of $0.5 million as of March 31, 2016. Upon maturity the liability will be $42 million.

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

Term Credit Agreement
On August 5, 2015, the Company entered into a credit agreement with CoBank, ACB, as administrative agent, and a syndicate of Farm Credit institutions and other commercial banks to provide $550 million of new credit facilities, including a five-year $200 million unsecured revolving credit facility (see below) and a nine-year $350 million term loan facility. The Company has entered into an interest rate swap transaction to fix the cost of the term loan facility over its nine-year term. The periodic interest rate on the term credit agreement is LIBOR plus 1.625%. The Company receives annual patronage refunds, which are profit distributions made by a cooperative to its member-users based on the quantity or value of business done with the member-user. The Company estimates the effective interest rate for the first quarter was approximately 3.3% after consideration of the estimated patronage refunds and interest rate swaps. As of March 31, 2016, the term debt was advanced in full under the term credit agreement.
Revolving Credit Facility
In August 2015, the Company entered into a five-year $200 million unsecured revolving credit facility, replacing the previous $200 million revolving credit facility and $100 million farm credit facility, which were scheduled to expire in April 2016 and December 2019, respectively. The periodic interest rate on the revolving credit facility is LIBOR plus 1.250%, with an unused commitment fee of 0.175%.
Net draws of $8.0 million were made in the first quarter of 2016 on the revolving credit facility. At March 31, 2016, the Company had available borrowings of $93.3 million under the revolving credit facility, net of $1.7 million to secure its outstanding letters of credit.
Joint Venture Debt
On March 3, 2016, the Company used proceeds from the term loan facility to fund a capital contribution into the New Zealand JV. The New Zealand JV in turn used the proceeds for full repayment of the outstanding amount of $155 million under its Tranche A credit facility.
The New Zealand JV also has a $27.6 million working capital facility. During the three months ended March 31, 2016, the New Zealand JV made $12.2 million of additional borrowings, net of repayments, on the facility. Draws totaling $15.4 million remain available on the working capital facility. In addition, the New Zealand JV paid $0.3 million of its shareholder loan held with the non-controlling interest party. Unfavorable changes in exchange rates for the three months ended March 31, 2016 increased debt on a U.S. dollar basis for its shareholder loan by $0.2 million.
Debt Covenants
In connection with the Company’s $350 million term credit agreement and $200 million revolving credit facility, customary covenants must be met, the most significant of which include interest coverage and leverage ratios. In addition to these financial covenants, the mortgage note, term credit agreement and revolving credit facility include customary covenants that limit the incurrence of debt and the disposition of assets, among others. At March 31, 2016, the Company was in compliance with all applicable covenants.
Subsequent Event
See Note 1Basis of Presentation for additional information on subsequent events.

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

Rayonier continuously assesses potential alternative uses of its timberlands, as some properties may become more valuable for development, residential, recreation or other purposes. The Company periodically transfers, via a sale or contribution from the 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.

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

An analysis of higher and better use timberlands and real estate development costs from December 31, 2015 to March 31, 2016 is shown below:
 
Higher and Better Use Timberlands and Real Estate Development Investments
 
Land and Timber
 
Development Investments
 
Total
Non-current portion at December 31, 2015

$57,897

 

$7,553

 

$65,450

Plus: Current portion (a)
6,019

 
6,233

 
12,252

Total Balance at December 31, 2015
63,916

 
13,786

 
77,702

Non-cash cost of land and improved development
(539
)
 
(139
)
 
(678
)
Timber depletion from harvesting activities and basis of timber sold in real estate sales
(467
)
 

 
(467
)
Capitalized real estate development investments

 
1,685

 
1,685

Capital expenditures (silviculture)
50

 

 
50

Intersegment transfers
4

 

 
4

Total Balance at March 31, 2016
62,964

 
15,332

 
78,296

Less: Current portion (a)
(6,655
)
 
(5,023
)
 
(11,678
)
Non-current portion at March 31, 2016

$56,309

 

$10,309

 

$66,618

 
 
 
 
 
(a)
The current portion of Higher and Better Use Timberlands and Real Estate Development Investments is recorded in Inventory. See Note 15Inventory for additional information.

6.
COMMITMENTS
The Company leases certain buildings, machinery, and equipment under various operating leases. The Company also has long-term lease agreements on certain timberlands in the Southern U.S. and New Zealand. U.S. leases typically have initial terms of approximately 30 to 65 years, with renewal provisions in some cases. New Zealand timberland lease terms range between 30 and 99 years. Such leases are generally non-cancellable and require minimum annual rental payments.
At March 31, 2016, the future minimum payments under non-cancellable operating and timberland leases were as follows:
 
Operating
Leases
 
Timberland
Leases (a)
 
Purchase Obligations (b)
 
Total
Remaining 2016

$1,449

 

$7,262

 

$3,512

 

$12,223

2017
1,473

 
10,772

 
3,358

 
15,603

2018
763

 
9,275

 
3,163

 
13,201

2019
620

 
8,789

 
3,163

 
12,572

2020
534

 
8,348

 
3,163

 
12,045

Thereafter (c)
1,613

 
158,766

 
10,724

 
171,103

 

$6,452

 

$203,212

 

$27,083

 

$236,747

 
 
 
 
 
(a)
The majority of timberland leases are subject to increases or decreases based on either the Consumer Price Index, Producer Price Index or market rates.
(b)
Purchase obligations include payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps) and standby letters of credit fees for industrial revenue bonds.
(c)
Includes 20 years of future minimum payments for perpetual Crown Forest Licenses (“CFL”). A CFL consists of a license to use public or government owned land to operate a commercial forest. The CFL's extend indefinitely and may only be terminated upon a 35 year termination notice from the government. If no termination notice is given, the CFLs renew automatically each year for a one year term. As of March 31, 2016, the New Zealand JV has four CFL’s under termination notice, terminating in 2034, two in 2044 and 2049 as well as two fixed term CFL’s expiring in 2062. The annual license fee is determined based on current market rental value, with triennial rent reviews.

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

7.
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 tax. The New Zealand JV is subject to corporate level tax in New Zealand. Non-REIT qualifying operations are conducted by the Company’s taxable REIT subsidiaries (“TRS”). 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
The Company’s effective tax rate is below the 35.0% U.S. statutory rate due to tax benefits associated with being a REIT. The income tax benefits for the three months ended March 31, 2016 and 2015 are principally related to the New Zealand JV.
The table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented:
 
Three Months Ended March 31,
 
2016
 
2015
Income tax expense at federal statutory rate

($4,997
)
 
35.0
 %
 

($6,198
)
 
35.0
 %
U.S. and foreign REIT income & U.S. TRS taxable losses
4,360

 
(30.6
)
 
7,502

 
(42.4
)
Foreign TRS operations
117

 
(0.8
)
 
1,137

 
(6.4
)
U.S. net deferred tax asset valuation allowance
(452
)
 
3.2

 
(1,812
)
 
10.2

Other
(80
)
 
0.6

 
(158
)
 
0.9

Income tax (expense) benefit before discrete items

($1,052
)
 
7.4
 %
 

$471

 
(2.7
)%
Tax benefit recognized related to changes in the New Zealand JV deferred tax inventory
1,833

 
(12.9
)
 

 

Income tax benefit as reported

$781

 
(5.5
)%
 

$471

 
(2.7
)%

8.
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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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 “Consolidated Complaint”). In the Consolidated Complaint, plaintiffs added allegations as to and added as a defendant N. Lynn Wilson, a former officer of Rayonier. With the filing of the Consolidated Complaint, David L. Nunes and H. Edwin Kiker were dropped from the case as defendants. Defendants timely filed Motions to Dismiss the Consolidated Complaint on May 15, 2015. After oral argument on Defendants' motions on August 25, 2015, the Court dismissed the Consolidated Complaint without prejudice, allowing plaintiffs leave to refile. Plaintiffs filed the Amended Consolidated Class Action Complaint (the “Amended Complaint”) on September 25, 2015, which continued to assert claims against the Company, as well as Ms. Wilson and Messrs. Boynton and Vanden Noort. Defendants timely filed Motions to Dismiss the Amended Complaint on October 26, 2015, which are pending. 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 has certain obligations to advance expenses and provide indemnification to certain current and former officers and directors of the Company. The Company has also incurred expenses as a result of costs arising from the investigation of the claims alleged in the various demands. 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 cooperated with the SEC and complied with its requests. 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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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

9.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies. As of March 31, 2016, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Associated Liability
Standby letters of credit (a)
 

$16,549

 

$15,000

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
906

 

Total financial commitments
 

$19,709

 

$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 2016 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At March 31, 2016, 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 2016 and 2017 and are expected to be renewed as required.
 
10.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
Three Months Ended March 31,
 
2016
 
2015
Net Income

$15,058

 

$18,180

Less: Net income attributable to noncontrolling interest
586

 
433

Net income attributable to Rayonier Inc.

$14,472

 

$17,747

 
 
 
 
Shares used for determining basic earnings per common share
122,556,239

 
126,614,334

Dilutive effect of:
 
 
 
Stock options
53,526

 
168,680

Performance and restricted shares
35,124

 
51,494

Assumed conversion of Senior Exchangeable Notes (a)

 
892,885

Assumed conversion of warrants (a)

 

Shares used for determining diluted earnings per common share
122,644,889

 
127,727,393

 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:

$0.12

 

$0.14

 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:

$0.12

 

$0.14



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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
March 31,
 
2016
 
2015
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
Stock options, performance and restricted shares
1,095,453

 
757,960

Assumed conversion of exchangeable note hedges (a)

 
892,885

Total
1,095,453

 
1,650,845

 
 
 
 
 
(a)    Rayonier did not issue additional shares upon maturity of the Senior Exchangeable Notes due August 2015 (the “2015
Notes”) due to offsetting hedges. ASC 260, Earnings Per Share required the assumed conversion of the 2015 Notes to be included in dilutive shares if the average stock price for the period exceeded the strike price, while the conversion of the hedges was excluded since they were anti-dilutive. The full dilutive effect of the 2015 Notes was included for the prior period presented.
Rayonier did not distribute additional shares upon the February 2016 maturity of the warrants sold in conjunction with the 2015 Notes as the stock price did not exceed $28.11 per share. The warrants were not dilutive for the three months ended March 31, 2016 and 2015 as the average stock price for the periods the warrants were outstanding did not exceed the strike price.

11.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks.
Accounting for derivative financial instruments is governed by 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 its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented.
Foreign Currency Exchange and Option Contracts
The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2016, foreign currency exchange contracts and foreign currency option contracts had maturity dates through June 2017 and July 2017, respectively.
Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

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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 August 2015, the Company entered into foreign currency option contracts (notional amount of $332 million) to mitigate the risk of fluctuations in foreign currency exchange rates when translating the New Zealand JV’s balance sheet to U.S. dollars. These contracts hedged a portion of the Company’s net investment in New Zealand and qualified as a net investment hedge. The fair value of these contracts was determined by a mark-to-market valuation, which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The hedges qualified for hedge accounting whereby fluctuations in fair market value during the life of the hedge are recorded in AOCI and remain there permanently unless a partial or full liquidation of the investment is made. At each reporting period, the Company reviews the hedges for ineffectiveness. Ineffectiveness can occur when changes to the investment or the hedged instrument are made such that the risk of foreign exchange movements are no longer mitigated by the hedging instrument. At that time, the amount related to the ineffectiveness of the hedge is recorded into earnings. The Company did not have any ineffectiveness during the life of the hedges. The foreign currency option contracts matured on February 3, 2016.
On February 1, 2016, the Company entered into foreign currency option contracts (notional amounts of $159.7 million and $154.6 million) to mitigate the risk of fluctuations in foreign exchange rates when funding the planned capital contribution to the New Zealand JV. On February 29, 2016, the contracts were settled for a net premium of $0.3 million. The gain on these contracts was recorded in “Other operating income, net” as they did not qualify for hedge accounting treatment.
On February 29, 2016, the Company purchased a foreign exchange forward contract (notional amount $159.5 million) to mitigate the risk of fluctuations in foreign exchange rate contracts when funding the planned capital contribution to the New Zealand JV. The contract matured on March 3, 2016, resulting in a gain of $0.9 million. The gain on this contract was recorded in “Other operating income, net” as it did not qualify for hedge accounting treatment.
Interest Rate Swaps
The Company used 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. On March 3, 2016, as part of the capital contribution into the New Zealand JV, the Company settled all remaining New Zealand JV interest rate swaps for $9.3 million. Initially, these hedges qualified for hedge accounting; however, upon consolidation of the New Zealand JV in 2013, the hedges no longer qualified, requiring all future changes in the fair market value of the hedges to be recorded in earnings.
The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.
In August 2015, the Company entered into a nine-year interest rate swap agreement for a notional amount of $170 million. This agreement fixes the LIBOR-related portion of the interest rate (LIBOR plus 1.625%) to an average rate of 2.20%. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.
Also, in August 2015, the Company entered into a nine-year forward interest rate swap agreement with a start date in April 2016 for a notional amount of $180 million. This agreement fixes the LIBOR-related portion of the interest rate (LIBOR plus 1.625%) to an average rate of 2.35%. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

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

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2016 and 2015.
 
 
 
Three Months Ended
March 31,
 
Income Statement Location
 
2016
 
2015
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive (loss) income
 

$711

 

($700
)
Foreign currency option contracts
Other comprehensive (loss) income
 
833

 
(681
)
Interest rate swaps
Other comprehensive (loss) income
 
(14,886
)
 

 
 
 
 
 
 
Derivatives designated as a net investment hedge:
 
 
 
 
 
Foreign currency exchange contract
Other comprehensive (loss) income
 
(4,606
)
 
591

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Other operating income, net
 
895

 

Foreign currency option contracts
Other operating income, net
 
258

 

Interest rate swaps
Interest income and miscellaneous (expense), net
 
(1,219
)
 
(1,855
)
During the next 12 months, the amount of the March 31, 2016 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 $0.8 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount
 
March 31, 2016
 
December 31, 2015
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$23,950

 

$21,250

Foreign currency option contracts
88,700

 
107,200

Interest rate swaps
350,000

 
350,000

 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
Foreign currency option contracts

 
331,588

 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
Interest rate swaps

 
130,169


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

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Location on Balance Sheet
 
Fair Value Assets / (Liabilities) (a)
 
 
 
March 31, 2016
 
December 31, 2015
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Prepaid and other current assets
 

$221

 

$43

 
Other assets
 
131

 

 
Other current liabilities
 
(1,275
)
 
(1,449
)
 
Other non-current liabilities
 

 
(219
)
Foreign currency option contracts
Prepaid and other current assets
 
711

 
560

 
Other assets
 
323

 
408

 
Other current liabilities
 
(702
)
 
(1,393
)
 
Other non-current liabilities
 
(141
)
 
(217
)
Interest rate swaps
Other non-current liabilities
 
(25,082
)
 
(10,197
)
 
 
 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
 
Foreign currency option contracts
Prepaid and other current assets
 

 
4,630

 
Other current liabilities
 

 
(24
)
 
 
 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
 
Interest rate swaps
Other non-current liabilities
 

 
(8,047
)
 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Prepaid and other current assets
 
 

$932

 

$5,233

Other assets
 
 
454

 
408

Total derivative assets
 
 

$1,386

 

$5,641

 
 
 
 
 
 
Other current liabilities
 
 
(1,977
)
 
(2,866
)
Other non-current liabilities
 
 
(25,223
)
 
(18,680
)
Total derivative liabilities
 
 

($27,200
)
 

($21,546
)
 
 
 
 
 
(a)
See Note 12Fair Value Measurements for further information on the fair value of the Company’s derivatives including their classification within the fair value hierarchy.

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


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

12.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
A three-level hierarchy that prioritizes the inputs used to measure fair value was established in the Accounting Standards Codification as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1.
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at March 31, 2016 and December 31, 2015, using market information and what the Company believes to be appropriate valuation methodologies under generally accepted accounting principles:
 
March 31, 2016
 
December 31, 2015
Asset (Liability) (a)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
Cash and cash equivalents

$76,204

 

$76,204

 

 

$51,777

 

$51,777

 

Restricted cash (b)
12,912

 
12,912

 

 
23,525

 
23,525

 

Current maturities of long-term debt
(12,211
)
 

 
(12,211
)
 

 

 

Long-term debt (c)
(857,429
)
 

 
(875,329
)
 
(830,554
)
 

 
(830,203
)
Interest rate swaps (d)
(25,082
)
 

 
(25,082
)
 
(18,244
)
 

 
(18,244
)
Foreign currency exchange contracts (d)
(923
)
 

 
(923
)
 
(1,625
)
 

 
(1,625
)
Foreign currency option contracts (d)
191

 

 
191

 
3,964

 

 
3,964

 
 
 
 
 
(a)
The Company did not have Level 3 assets or liabilities at March 31, 2016.
(b)
Restricted cash is recorded in “Other Assets” and represents the proceeds from LKE sales deposited with a third-party intermediary.
(c)
The carrying amount of long-term debt is presented net of capitalized debt costs on non-revolving debt. See Note 1Basis of Presentation for additional information.
(d)
See Note 11Derivative 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 cash — The carrying amount is equal to fair market value.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.
Interest rate swap agreements — The fair value of interest rate contracts is determined by discounting the expected future cash flows, for each instrument, at prevailing interest rates.
Foreign currency exchange contracts — The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.
Foreign currency option contracts — The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.


18


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 2016, the Company has no mandatory pension contribution requirement.
The net pension and postretirement benefit costs that have been recorded are shown in the following table:
 
Pension
 
Postretirement
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

$327

 

$371

 

$2

 

$3

Interest cost
869

 
830

 
12

 
13

Expected return on plan assets
(1,008
)
 
(1,007
)
 

 

Amortization of prior service cost

 
3

 

 

Amortization of losses (gains)
629

 
933

 
(12
)
 
3

Net periodic benefit cost

$817

 

$1,130

 

$2

 

$19

 
 
 
 
 
 
 
 

14.
OTHER OPERATING INCOME, NET
Other operating income, net comprised the following:
 
Three Months Ended March 31,
 
2016
 
2015
Lease income, primarily from hunting leases

$4,559

 

$4,109

Other non-timber income
519

 
1,364

Foreign currency loss
(295
)
 
(107
)
Loss on foreign currency exchange and option contracts
(522
)
 
(134
)
Gain on foreign currency derivatives (a)
1,153

 

Miscellaneous income, net
490

 
342

Total

$5,904

 

$5,574

 
 
 
 
 
(a)
The Company used foreign exchange derivatives to mitigate the risk of fluctuations in foreign exchange rates while awaiting the planned capital contribution to the New Zealand JV.


19


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

15.
INVENTORY
As of March 31, 2016 and December 31, 2015, Rayonier’s inventory was solely comprised of finished goods, as follows:
 
March 31, 2016
 
December 31, 2015
Finished goods inventory
 
 
 
Real estate inventory (a)

$11,678

 

$12,252

Log inventory
5,765

 
3,099

Total inventory

$17,443

 

$15,351

 
 
 
 
 
(a)
Represents cost of HBU real estate (including capitalized development investments) expected to be sold within 12 months.

16.
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 March 31, 2016 and December 31, 2015, the Company had $12.9 million and $23.5 million, respectively, of proceeds from real estate sales classified as restricted cash in “Other Assets,” which were deposited with an LKE intermediary.

17.
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The following table summarizes the changes in AOCI by component for the three months ended March 31, 2016 and the year ended December 31, 2015. All amounts are presented net of tax and exclude portions attributable to noncontrolling interest.
 
Foreign currency translation gains/ (losses)
 
Net investment hedges of New Zealand JV
 
Cash flow hedges
 
Employee benefit plans
 
Total
Balance as of December 31, 2014

$25,533

 
(145
)
 

($1,548
)
 

($28,665
)
 

($4,825
)
Other comprehensive income/(loss) before reclassifications
(27,983
)
 
6,416

 
(14,444
)
(a)
(354
)
 
(36,365
)
Amounts reclassified from accumulated other comprehensive loss

 

 
4,400

 
3,287

(b)
7,687

Net other comprehensive income/(loss)
(27,983
)
 
6,416

 
(10,044
)
 
2,933

 
(28,678
)
Balance as of December 31, 2015

($2,450
)
 

$6,271

 

($11,592
)
 

($25,732
)
 

($33,503
)
Other comprehensive income/(loss) before reclassifications
4,396

 

 
(14,336
)
(c)

 
(9,940
)
Amounts reclassified from accumulated other comprehensive loss

 
(4,606
)
 
413

 
617


(3,576
)
Net other comprehensive income/(loss)
4,396

 
(4,606
)
 
(13,923
)

617


(13,516
)
Recapitalization of New Zealand JV
3,622

 

 
(184
)
 

 
3,438

Balance as of March 31, 2016

$5,568

 

$1,665

 

($25,699
)
 

($25,115
)
 

($43,581
)
 
 
 
 
 
(a)
Includes $10.2 million of other comprehensive loss related to interest rate swaps entered into in the third quarter 2015. See Note 11Derivative Financial Instruments and Hedging Activities for additional information.
(b)
This component of other comprehensive income is included in the computation of net periodic pension cost. See Note 13Employee Benefit Plans for additional information.
(c)
Includes $14.8 million of other comprehensive loss related to interest rate swaps entered into in third quarter 2015. See Note 11Derivative Financial Instruments and Hedging Activities for additional information.

20


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

The following table presents details of the amounts reclassified in their entirety from AOCI to net income for the three months ended March 31, 2016 and March 31, 2015:
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other comprehensive income
 
Affected line item in the income statement
 
 
March 31, 2016
 
March 31, 2015
 
 
Realized loss on foreign currency exchange contracts
 

$334

 

$364

 
Other operating income, net
Realized loss on foreign currency option contracts
 
554

 
293

 
Other operating income, net
Noncontrolling interest
 
(314
)
 
(230
)
 
Comprehensive (loss) income attributable to noncontrolling interest
Income tax benefit on loss from foreign currency contracts
 
(161
)
 
(135
)
 
Income tax benefit
Net loss from accumulated other comprehensive income
 

$413

 

$292

 
 



21


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

18.
CONSOLIDATING FINANCIAL STATEMENTS
The condensed consolidating financial information below follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation, and the allocation of certain expenses of Rayonier Inc. incurred for the benefit of its subsidiaries.
In March 2012, Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022. In connection with these notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
The subsidiary guarantors, Rayonier Operating Company LLC (“ROC”) and Rayonier TRS Holdings Inc., are wholly-owned by the Parent Company, Rayonier Inc. The notes are fully and unconditionally guaranteed on a joint and several basis by the guarantor subsidiaries.
 
CONDENSED CONSOLIDATING STATEMENTS OF (LOSS) INCOME
 AND COMPREHENSIVE (LOSS) INCOME
 
For the Three Months Ended March 31, 2016
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES

 

 

$134,843

 

 

$134,843

Costs and Expenses
 
 
 
 
 
 
 
 
 
Cost of sales

 

 
107,971

 

 
107,971

Selling and general expenses

 
2,938

 
6,841

 

 
9,779

Other operating (income) expense, net

 
(1,155
)
 
(4,749
)
 

 
(5,904
)
 

 
1,783

 
110,063

 

 
111,846

OPERATING (LOSS) INCOME

 
(1,783
)
 
24,780

 

 
22,997

Interest expense
(3,139
)
 
(2,144
)
 
(1,815
)
 

 
(7,098
)
Interest and miscellaneous income (expense), net
2,038

 
681

 
(4,341
)
 

 
(1,622
)
Equity in income from subsidiaries
15,573

 
18,997

 

 
(34,570
)
 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
14,472

 
15,751

 
18,624

 
(34,570
)
 
14,277

Income tax (expense) benefit

 
(178
)
 
959

 

 
781

NET INCOME
14,472

 
15,573

 
19,583

 
(34,570
)
 
15,058

Less: Net income attributable to noncontrolling interest

 

 
586

 

 
586

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
14,472

 
15,573

 
18,997

 
(34,570
)
 
14,472

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 


 
 
Foreign currency translation adjustment, net of income tax
7,288

 
(4,606
)
 
7,410

 
(7,288
)
 
2,804

Cash flow hedges, net of income tax
(13,923
)
 
(14,886
)
 
1,112

 
13,923

 
(13,774
)
Actuarial change and amortization of pension and postretirement plans, net of income tax
617

 
617

 

 
(617
)
 
617

Total other comprehensive income (loss)
(6,018
)
 
(18,875
)
 
8,522

 
6,018

 
(10,353
)
COMPREHENSIVE INCOME (LOSS)
8,454

 
(3,302
)
 
28,105

 
(28,552
)
 
4,705

Less: Comprehensive loss attributable to noncontrolling interest

 

 
(3,749
)
 

 
(3,749
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO RAYONIER INC.

$8,454

 

($3,302
)
 

$31,854

 

($28,552
)
 

$8,454

 
 
 
 
 
 
 
 
 
 

22


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

 
CONDENSED CONSOLIDATING STATEMENTS OF (LOSS) INCOME
AND COMPREHENSIVE (LOSS) INCOME
 
For the Three Months Ended March 31, 2015
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES

 

 

$140,305

 

 

$140,305

Costs and Expenses
 
 
 
 
 
 

 
 
Cost of sales

 

 
107,234

 

 
107,234

Selling and general expenses

 
4,949

 
5,949

 

 
10,898

Other operating income, net

 

 
(5,574
)
 

 
(5,574
)
 

 
4,949

 
107,609

 

 
112,558

OPERATING (LOSS) INCOME

 
(4,949
)
 
32,696

 

 
27,747

Interest expense
(3,168
)
 
(2,524
)
 
(2,852
)
 

 
(8,544
)
Interest and miscellaneous income (expense), net
1,936

 
693

 
(4,123
)
 

 
(1,494
)
Equity in income from subsidiaries
18,979

 
24,799

 

 
(43,778
)
 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
17,747

 
18,019

 
25,721

 
(43,778
)
 
17,709

Income tax benefit (expense)

 
960

 
(489
)
 

 
471

NET INCOME
17,747

 
18,979

 
25,232

 
(43,778
)
 
18,180

Less: Net income attributable to noncontrolling interest

 

 
433

 

 
433

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
17,747

 
18,979

 
24,799

 
(43,778
)
 
17,747

OTHER COMPREHENSIVE LOSS (INCOME)
 
 
 
 
 
 


 
 
Foreign currency translation adjustment, net of income tax
(10,430
)
 
(10,430
)
 
(14,323
)
 
20,860

 
(14,323
)
Cash flow hedges, net of income tax
(615
)
 
(615
)
 
(946
)
 
1,230

 
(946
)
Actuarial change and amortization of pension and postretirement plans, net of income tax
781

 
781

 
20

 
(801
)
 
781

Total other comprehensive loss
(10,264
)
 
(10,264
)
 
(15,249
)
 
21,289

 
(14,488
)
COMPREHENSIVE INCOME (LOSS)
7,483

 
8,715

 
9,983

 
(22,489
)
 
3,692

Less: Comprehensive loss attributable to noncontrolling interest

 

 
(3,791
)
 

 
(3,791
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO RAYONIER INC.

$7,483

 

$8,715

 

$13,774

 

($22,489
)
 

$7,483