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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, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
  
 
Non-accelerated filer  o
  
Smaller reporting company o
  
Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 28, 2017, there were outstanding 128,827,667 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,
 
 
2017
 
2016
SALES
 

$186,512

 

$134,843

Costs and Expenses
 
 
 
 
Cost of sales
 
136,413

 
107,971

Selling and general expenses
 
9,590

 
9,779

Other operating income, net (Note 14)
 
(8,752
)
 
(5,904
)
 
 
137,251

 
111,846

OPERATING INCOME
 
49,261

 
22,997

Interest expense
 
(8,415
)
 
(7,098
)
Interest income and miscellaneous income (expense), net
 
518

 
(1,622
)
INCOME BEFORE INCOME TAXES
 
41,364

 
14,277

Income tax (expense) benefit
 
(6,281
)
 
781

NET INCOME
 
35,083

 
15,058

Less: Net income attributable to noncontrolling interest
 
1,240

 
586

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
 
33,843

 
14,472

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
Foreign currency translation adjustment, net of income tax expense of $0 and $0
 
2,432

 
2,804

Cash flow hedges, net of income tax (expense) benefit of ($32) and $432
 
2,553

 
(13,774
)
Amortization of pension and postretirement plans, net of income tax expense of $0 and $0
 
116

 
617

Total other comprehensive income (loss)
 
5,101

 
(10,353
)
COMPREHENSIVE INCOME
 
40,184

 
4,705

Less: Comprehensive income (loss) attributable to noncontrolling interest
 
1,651

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

$38,533

 

$8,454

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

$0.27

 

$0.12

Diluted earnings per share attributable to Rayonier Inc.
 

$0.27

 

$0.12

 
 
 
 
 
Dividends declared per share
 

$0.25

 

$0.25


See Notes to Consolidated Financial Statements.

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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
March 31, 2017
 
December 31, 2016
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents

$219,357

 

$85,909

Accounts receivable, less allowance for doubtful accounts of $33 and $33
33,434

 
20,664

Insurance settlement receivable (Note 8)
73,000

 

Inventory (Note 15)
27,155

 
21,379

Prepaid expenses
14,723

 
11,807

Assets held for sale (Note 17)
9,006

 
23,171

Other current assets
8,247

 
1,874

Total current assets
384,922

 
164,804

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,280,814

 
2,291,015

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT
     INVESTMENTS (NOTE 5)
73,713

 
70,374

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
2,279

 
2,279

Buildings
8,094

 
7,990

Machinery and equipment
4,690

 
4,658

Construction in progress
11,013

 
8,170

Total property, plant and equipment, gross
26,076

 
23,097

Less — accumulated depreciation
(9,227
)
 
(9,063
)
Total property, plant and equipment, net
16,849

 
14,034

RESTRICTED CASH (Note 16)
111,276

 
71,708

OTHER ASSETS
51,336

 
73,825

TOTAL ASSETS

$2,918,910

 

$2,685,760

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$30,956

 

$22,337

Insurance settlement payable (Note 8)
73,740

 

Current maturities of long-term debt
42,926

 
31,676

Accrued taxes
3,348

 
2,657

Accrued payroll and benefits
3,079

 
9,277

Accrued interest
8,321

 
5,340

Other current liabilities
20,572

 
20,679

Total current liabilities
182,942

 
91,966

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
1,028,068

 
1,030,205

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 13)
31,718

 
31,856

OTHER NON-CURRENT LIABILITIES
28,888

 
34,981

COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 128,760,051 and 122,904,368 shares issued and outstanding
865,343

 
709,867

Retained earnings
689,612

 
700,887

Accumulated other comprehensive income
5,545

 
856

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,560,500

 
1,411,610

Noncontrolling interest
86,794

 
85,142

TOTAL SHAREHOLDERS’ EQUITY
1,647,294

 
1,496,752

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,918,910

 

$2,685,760


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, 2015
122,770,217

 

$708,827

 

$612,760

 

($33,503
)
 

$73,656

 

$1,361,740

Net income

 

 
211,972

 

 
5,798

 
217,770

Dividends ($1.00 per share)

 

 
(123,155
)
 

 

 
(123,155
)
Issuance of shares under incentive stock plans
179,743

 
1,576

 

 

 

 
1,576

Stock-based compensation

 
5,136

 

 

 

 
5,136

Repurchase of common shares
(45,592
)
 
(178
)
 
(690
)
 

 

 
(868
)
Actuarial change and amortization of pension and postretirement plan liabilities

 

 

 
5,533

 

 
5,533

Foreign currency translation adjustment

 

 

 
2,780

 
3,542

 
6,322

Cash flow hedges

 

 

 
22,608

 
214

 
22,822

Recapitalization of New Zealand Joint Venture

 
(5,398
)
 

 
3,438

 
1,960

 

Recapitalization costs

 
(96
)
 

 

 
(28
)
 
(124
)
Balance, December 31, 2016
122,904,368

 

$709,867

 

$700,887

 

$856

 

$85,142

 

$1,496,752

Cumulative-effect adjustment due to adoption of ASU No. 2016-16

 

 
(14,365
)
 

 

 
(14,365
)
Net income

 

 
33,843

 

 
1,240

 
35,083

Dividends ($0.25 per share)

 

 
(30,753
)
 

 

 
(30,753
)
Issuance of shares under incentive stock plans
105,981

 
2,251

 

 

 

 
2,251

Stock-based compensation

 
880

 

 

 

 
880

Repurchase of common shares
(298
)
 

 

 

 

 

Amortization of pension and postretirement plan liabilities

 

 

 
116

 

 
116

Foreign currency translation adjustment

 

 

 
2,002

 
430

 
2,432

Cash flow hedges

 


 

 
2,571

 
(18
)
 
2,553

Issuance of shares under equity offering, net of costs
5,750,000

 
152,345

 

 

 

 
152,345

Balance, March 31, 2017
128,760,051

 

$865,343

 

$689,612

 

$5,545

 

$86,794

 

$1,647,294


See Notes to Consolidated Financial Statements.















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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income

$35,083

 

$15,058

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
30,773

 
29,342

Non-cash cost of land and improved development
4,479

 
4,108

Stock-based incentive compensation expense
880

 
839

Deferred income taxes
5,989

 
(545
)
Amortization of losses from pension and postretirement plans
116

 
617

Gain on sale of large disposition of timberlands
(28,188
)
 

Other
2,306

 
(1,081
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(11,442
)
 
(6,904
)
Inventories
(3,481
)
 
(4,619
)
Accounts payable
5,886

 
1,369

Income tax receivable/payable
(126
)
 
(98
)
All other operating activities
(8,332
)
 
(7,051
)
CASH PROVIDED BY OPERATING ACTIVITIES
33,943

 
31,035

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(14,362
)
 
(13,298
)
Real estate development investments
(2,185
)
 
(1,685
)
Purchase of timberlands
(11,293
)
 
(14,323
)
Net proceeds from large disposition of timberlands
42,034

 

Rayonier office building under construction
(2,604
)
 
(186
)
Change in restricted cash
(39,568
)
 
10,613

Other
(5,617
)
 
(1,404
)
CASH USED FOR INVESTING ACTIVITIES
(33,595
)
 
(20,283
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
29,719

 
285,552

Repayment of debt
(20,530
)
 
(240,752
)
Dividends paid
(30,618
)
 
(30,675
)
Proceeds from the issuance of common shares under incentive stock plan
2,251

 
18

Proceeds from the issuance of common shares from equity offering, net of costs
152,345

 

Repurchase of common shares made under share repurchase program

 
(690
)
Other

 
(16
)
CASH PROVIDED BY FINANCING ACTIVITIES
133,167

 
13,437

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(67
)
 
238

CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
133,448

 
24,427

Balance, beginning of year
85,909

 
51,777

Balance, end of period

$219,357

 

$76,204

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

$3,695

 

$5,808

Income taxes
214

 
119

Non-cash investing activity:
 
 
 
Capital assets purchased on account
5,430

 
2,725

 
 
 
 
 
(a)
Interest paid is presented net of patronage payments received of $3.0 million and $0.4 million for the three months ended March 31, 2017 and March 31, 2016, respectively. For additional information on patronage payments, see Note 5 Debt in the 2016 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 (“GAAP”) 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, 2016, as filed with the SEC (the “2016 Form 10-K”).
Recently Adopted Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, stating entities should recognize income tax consequences of intra-entity transfers of assets other than inventory in the period in which they occur. As such, the Company is required to apply the changes on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU No. 2016-16 is effective for annual periods beginning after December 15, 2017 with early adoption permitted at the beginning of an annual period for which financial statements have not been issued. Rayonier early adopted ASU No. 2016-16 in this quarterly report on Form 10-Q. See Note 7 Income Taxes for additional information.
In March 2016, the FASB issued 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 adopted ASU No. 2016-09 during the first quarter ended March 31, 2017. Upon adoption, additional excess tax benefits and tax deficiencies are recorded to “Income tax (expense) benefit” in the Consolidated Statements of Income and Comprehensive Income, forfeitures are accounted for when they occur and cash paid by Rayonier when directly withholding shares for tax withholding purposes are classified as a financing activity within the statement of cash flows. The adoption of this standard did not have a material impact on the consolidated financial statements.
New Accounting Standards
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Rayonier intends to adopt ASU No. 2016-18 in the Company’s first quarter 2018 Form 10-Q. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No. 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU No. 2016-15 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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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)

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. ASU No. 2016-02 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.
In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), 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 update clarifies the guidance for identifying performance obligations. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The update clarifies the guidance for assessing collectibility, presenting sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition and disclosing the accounting change in the period of adoption. In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The update clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. 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 the Southern Timber, Pacific Northwest Timber, New Zealand Timber and Real Estate segments.

Subsequent Events
Acquisition of 94,400 acres of coastal Florida, Georgia and South Carolina timberland
In April 2017, the Company completed two separate transactions for the purchase of approximately 94,400 acres of timberland in coastal Florida, Georgia and South Carolina. The final aggregate purchase price of these two transactions, along with a 700 acre transaction that closed in March 2017, was approximately $214 million, or $2,250 per acre. These previously-announced acquisitions were made with proceeds from an equity offering completed in March 2017 and like-kind exchange proceeds from real estate and timberland sales.

2.
JOINT VENTURE INVESTMENT
Matariki Forestry Group
The Company maintains a controlling financial interest in Matariki Forestry Group (the "New Zealand JV"), a joint venture that owns or leases approximately 0.4 million legal acres of New Zealand timberland. Accordingly, the Company 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 Statements of Income and Comprehensive Income and Consolidated Statements 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” or “unallocated interest expense and other.”
The following tables summarize the segment information for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended
March 31,
SALES
 
2017
 
2016
Southern Timber
 

$32,715

 

$44,740

Pacific Northwest Timber
 
24,792

 
19,309

New Zealand Timber
 
40,740

 
36,023

Real Estate (a)
 
54,289

 
13,363

Trading
 
33,976

 
21,408

Total
 

$186,512

 

$134,843

 
 
 
 
 
(a) The three months ended March 31, 2017 includes $42.0 million from Large Dispositions.
 
 
Three Months Ended
March 31,
OPERATING INCOME (LOSS)
 
2017
 
2016
Southern Timber
 

$13,939

 

$15,753

Pacific Northwest Timber
 
(878
)
 
1,385

New Zealand Timber
 
10,243

 
4,744

Real Estate (a)
 
29,665

 
4,225

Trading
 
1,097

 
350

Corporate and other
 
(4,805
)
 
(3,460
)
Total Operating Income
 
49,261

 
22,997

Unallocated interest expense and other
 
(7,897
)
 
(8,720
)
Total Income before Income Taxes
 

$41,364

 

$14,277

 
 
 
 
 
(a) The three months ended March 31, 2017 includes $28.2 million from Large Dispositions.

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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,
DEPRECIATION, DEPLETION AND AMORTIZATION
 
2017
 
2016
Southern Timber
 

$12,452

 

$16,556

Pacific Northwest Timber
 
10,210

 
4,639

New Zealand Timber
 
5,407

 
4,860

Real Estate (a)
 
10,707

 
3,203

Trading
 

 

Corporate and other
 
100

 
84

Total
 

$38,876

 

$29,342

 
 
 
 
 
(a) The three months ended March 31, 2017 includes $8.1 million from Large Dispositions.
 
 
Three Months Ended
March 31,
NON-CASH COST OF LAND AND IMPROVED DEVELOPMENT
 
2017
 
2016
Southern Timber
 

 

Pacific Northwest Timber
 

 

New Zealand Timber
 

 
1,824

Real Estate (a)
 
10,222

 
2,284

Trading
 

 

Corporate and other
 

 

Total
 

$10,222

 

$4,108

 
 
 
 
 
(a) The three months ended March 31, 2017 includes $5.7 million from Large Dispositions.


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

4.
DEBT
Rayonier’s debt consisted of the following at March 31, 2017:
 
March 31, 2017
Term Credit Agreement borrowings due 2024 at a variable interest rate of 2.5% at March 31, 2017 (a)

$350,000

Senior Notes due 2022 at a fixed interest rate of 3.75%
325,000

Incremental Term Loan Agreement borrowings due 2026 at a variable interest rate of 2.7% at March 31, 2017 (b)
300,000

Mortgage Notes due 2017 at fixed interest rates of 4.35%
31,601

Revolving Credit Facility borrowings due 2020 at an average variable interest rate of 2.2% at March 31, 2017
40,000

New Zealand JV Working Capital Facility due 2017 at an average variable interest rate of 2.6% at March 31, 2017
11,325

New Zealand JV noncontrolling interest shareholder loan at 0% interest rate
16,486

Total debt
1,074,412

Less: Current maturities of long-term debt
(42,926
)
Less: Deferred financing costs
(3,418
)
Long-term debt, net of deferred financing costs

$1,028,068

 
 
 
 
 
(a)
As of March 31, 2017, the periodic interest rate on the term loan facility was LIBOR plus 1.625%. The Company estimates the effective fixed interest rate on the term loan facility to be approximately 3.3% after consideration of interest rate swaps and estimated patronage refunds.
(b)
As of March 31, 2017, the periodic interest rate on the incremental term loan was LIBOR plus 1.900%. The Company estimates the effective fixed interest rate on the incremental term loan facility to be approximately 2.8% after consideration of interest rate swaps and estimated patronage refunds.
Principal payments due during the next five years and thereafter are as follows:
2017 (a)
42,825

2018

2019

2020
40,000

2021

Thereafter
991,486

Total Debt

$1,074,311

 
 
 
 
 
(a)
The mortgage notes due in 2017 were recorded at a premium of $0.1 million as of March 31, 2017. Upon maturity the liability will be $31.5 million.
2017 Debt Activity
During the three months ended March 31, 2017, the Company made additional borrowings of $15.0 million on the Revolving Credit Facility. Proceeds from the additional borrowings were used to repay the $15.0 million solid waste bonds that were due in 2020. As of March 31, 2017, the Company had available borrowings of $154.6 million under the Revolving Credit Facility, net of $5.4 million to secure its outstanding letters of credit.
In addition, the New Zealand JV made $11.3 million of borrowings, net of repayments and changes in exchange rates, on the working capital facility (the “New Zealand JV Working Capital Facility”). As of March 31, 2017, draws totaling NZ$23.8 million remain available on the working capital facilities. The New Zealand JV also paid $2.5 million of its shareholder loan held with the non-controlling interest party during the three months ended March 31, 2017. Changes in exchange rates increased debt on a U.S. dollar basis for its shareholder loan by $0.2 million.

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

Debt Covenants
In connection with the Company’s $350 million term credit agreement (the “Term Credit Agreement”), $300 million incremental term loan agreement (“the Incremental Term Loan Agreement”) and $200 million revolving credit facility (“the 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 listed above, the Mortgage Notes, Senior Notes, Term Credit Agreement, Incremental Term Loan Agreement and Revolving Credit Facility include customary covenants that limit the incurrence of debt and the disposition of assets, among others. At March 31, 2017, the Company was in compliance with all applicable covenants.


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 real estate investment trust (“REIT”) entities to taxable REIT subsidiaries (“TRS”), higher and better use (“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, 2016 to March 31, 2017 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, 2016

$59,956

 

$10,418

 

$70,374

Plus: Current portion (a)
5,096

 
11,963

 
17,059

Total Balance at December 31, 2016
65,052

 
22,381

 
87,433

Non-cash cost of land and improved development
(438
)
 
(8
)
 
(446
)
Timber depletion from harvesting activities and basis of timber sold in real estate sales
(359
)
 

 
(359
)
Capitalized real estate development investments (b)

 
2,185

 
2,185

Capital expenditures (silviculture)
88

 

 
88

Intersegment transfers
4,144

 

 
4,144

Total Balance at March 31, 2017
68,487

 
24,558

 
93,045

Less: Current portion (a)
(5,678
)
 
(13,654
)
 
(19,332
)
Non-current portion at March 31, 2017

$62,809

 

$10,904

 

$73,713

 
 
 
 
 
(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.
(b)
Capitalized real estate development investments includes $0.1 million of capitalized interest.


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

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, 2017, the future minimum payments under non-cancellable operating leases, timberland leases and other commitments were as follows:
 
Operating
Leases
 
Timberland
Leases (a)
 
Commitments (b)
 
Total
Remaining 2017

$1,300

 

$7,209

 

$8,561

 

$17,070

2018
1,022

 
9,163

 
7,181

 
17,366

2019
813

 
8,688

 
7,174

 
16,675

2020
639

 
8,284

 
7,174

 
16,097

2021
554

 
8,342

 
7,174

 
16,070

Thereafter (c)
1,187

 
152,075

 
22,223

 
175,485

 

$5,515

 

$193,761

 

$59,487

 

$258,763

 
 
 
 
 
(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)
Commitments include payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps) and construction of the Company’s office building.
(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, 2017, the New Zealand JV has four CFL’s under termination notice, two that are currently being relinquished as harvest activities are concluding, one each in 2034 and 2044, 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 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 TRS. The primary businesses performed in Rayonier’s TRS include log trading and certain real estate activities, such as the sale and entitlement of development HBU properties. For the three months ended March 31, 2017, the Company recorded income tax expense of $6.3 million. For the three months ended March 31, 2016, income tax benefit was $0.8 million.

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 Company’s annualized effective tax rate (“AETR”) for the three months ended March 31, 2017 and March 31, 2016 was 15.6% and (5.5)%, respectively. The increase in income tax expense, and the corresponding AETR for the three months ended March 31, 2017, is principally related to the New Zealand JV.

In accordance with GAAP, the Company recognizes the impact of a tax position if a position is “more-likely-than-not” to prevail. For the three months ended March 31, 2017, there were no material changes in uncertain tax positions.
Prepaid Taxes
In the first quarter 2017, the Company early adopted ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. ASU No. 2016-16 requires income tax consequences of intra-entity transfers of assets other than inventory be recognized in the period in which they occur. See Note 1Basis of Presentation. As a result, a cumulative-effect adjustment to retained earnings was recorded for the long-term prepaid federal income tax of $14.4 million related to recognized built-in gains on 2006, 2008 and 2010 intercompany sales of timberlands between the REIT and the TRS. Taxes for the transactions were paid at the time of sale, but the gain and income tax expense were deferred. See the Consolidated Statement of Shareholders’ Equity for the cumulative-effect adjustment to retained earnings due to the adoption of this standard.

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

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.
    
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. The court denied those motions on May 20, 2016. At December 31, 2016, the case continued to be in the discovery phase and the Company could not determine whether there was a reasonable likelihood a material loss had been incurred nor could the range of any such loss be estimated. On March 13, 2017, the Company reached an agreement in principle to settle the case and all parties executed a term sheet memorializing such agreement. The parties executed and filed with the Court the Stipulation and Agreement of Settlement on April 12, 2017 (the “Settlement Agreement”), which the Settlement Agreement included the material terms contained in the term sheet executed on March 13. Pursuant to the terms of the Settlement Agreement, which is subject to Court approval and requests for exclusion by members of the settlement class, the Company agreed to cause certain of its directors’ and officers’ liability insurance carriers to fund a settlement payment to the class of $73 million. In connection with the settlement, the Company agreed to reimburse one of its insurance carriers approximately $740,000 for certain disputed pre-litigation expenses, which reimbursement is expected to be made in the first half of 2017. The amounts agreed to on March 13, 2017, including the realized amount to be funded by the insurance carriers, were reflected in the Company’s Consolidated Financial Statements as of March 31, 2017.


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

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.

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.

9.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies.
As of March 31, 2017, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Associated Liability
Standby letters of credit (a)
 

$5,366

 

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
683

 

Total financial commitments
 

$8,303

 

$43

 
 
 
 
 
(a)
Approximately $3.8 million of the standby letters of credit serve as credit support for infrastructure at the Company’s Wildlight development project. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation. These letters of credit will expire at various dates during 2017 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, 2017, 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. Rayonier has also obtained performance bonds to secure the development activity at the Company’s Wildlight development project. These surety bonds expire at various dates during 2017 and 2018 and are expected to be renewed as required.
 

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

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,
 
 
2017
 
2016
Net Income
 

$35,083

 

$15,058

Less: Net income attributable to noncontrolling interest
 
1,240

 
586

Net income attributable to Rayonier Inc.
 

$33,843

 

$14,472

 
 
 
 
 
Shares used for determining basic earnings per common share
 
123,587,901

 
122,556,239

Dilutive effect of:
 
 
 
 
Stock options
 
106,690

 
53,526

Performance and restricted shares
 
228,275

 
35,124

Shares used for determining diluted earnings per common share
 
123,922,866

 
122,644,889

 
 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:
 

$0.27

 

$0.12

 
 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:
 

$0.27

 

$0.12


 
 
Three Months Ended
March 31,
 
 
2017
 
2016
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
 
Stock options, performance and restricted shares
 
592,653

 
1,095,453

Total
 
592,653

 
1,095,453




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

11.
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 ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. 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 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% 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, 2017, foreign currency exchange contracts and foreign currency option contracts had maturity dates through February 2019 and August 2018, 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.
In March 2017, the Company purchased foreign exchange forward contracts (notional amount of $11.3 million) to mitigate the risk of fluctuations in foreign exchange rates when making shareholder loan payments which are denominated in U.S. dollars. For additional information on the shareholder loan see Note 4Debt. The New Zealand JV typically hedges 75% to 100% of its estimated foreign currency exposure with respect to the following three months forecasted distributions, up to 75% of forecasted distributions for the forward three to six months and up to 50% of the forward six to 12 months. As of March 31, 2017, the change in fair value of the foreign exchange forward contracts of $0.1 million was recorded in “Interest income and miscellaneous (income) expense, net” as it did not qualify for hedge accounting treatment.
Interest Rate Swaps
The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan 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 swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.20%. Together with the bank margin of 1.63%, this results in a rate of 3.83% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

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

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 swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.35%. Together with the bank margin of 1.63%, this results in a rate of 3.97% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.
In April 2016, the Company entered into two 10-year interest rate swap agreements, each for a notional amount of $100 million. These swap agreements fix the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 to an average rate of 1.60%. Together with the bank margin of 1.90%, this results in a rate of 3.50% before estimated patronage payments. These derivative instruments have been designated as interest rate cash flow hedges and qualify for hedge accounting.
In July 2016, the Company entered into an interest rate swap agreement for a notional amount of $100 million through May 2026. This swap agreement fixes the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 from LIBOR to an average rate of 1.26%. Together with the bank margin of 1.90%, this results in a rate of 3.16% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.
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, 2017 and 2016.
 
 
 
Three Months Ended
March 31,
 
Income Statement Location
 
2017
 
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income (loss)
 

($71
)
 

$711

Foreign currency option contracts
Other comprehensive income (loss)
 
(41
)
 
833

Interest rate swaps
Other comprehensive income (loss)
 
2,633

 
(14,886
)
 
 
 
 
 
 
Derivatives designated as a net investment hedge:
 
 
 
 
 
Foreign currency exchange contract
Other comprehensive income (loss)
 

 
(4,606
)
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Other operating income, net
 

 
895

 
Interest income and miscellaneous income (expense), net
 
125

 

Foreign currency option contracts
Other operating income, net
 

 
258

Interest rate swaps
Interest income and miscellaneous income (expense), net
 

 
(1,219
)
During the next 12 months, the amount of the March 31, 2017 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a gain of approximately $0.6 million.

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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 notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount
 
March 31, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$61,200

 

$44,800

Foreign currency option contracts
81,000

 
91,000

Interest rate swaps
650,000

 
650,000

 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
Foreign currency exchange contracts
11,250

 


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

The following table 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, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 

$730

 

$692

 
Other assets
 
102

 
33

 
Other current liabilities
 
(223
)
 
(261
)
 
Other non-current liabilities
 
(7
)
 

Foreign currency option contracts
Other current assets
 
718

 
1,064

 
Other assets
 
167

 
327

 
Other current liabilities
 
(335
)
 
(574
)
 
Other non-current liabilities
 
(200
)
 
(426
)
Interest rate swaps
Other assets
 
18,106

 
17,204

 
Other non-current liabilities
 
(4,248
)
 
(5,979
)
 
 
 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
121

 

 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Other current assets
 
 

$1,569

 

$1,756

Other assets
 
 
18,375

 
17,564

Total derivative assets
 
 

$19,944

 

$19,320

 
 
 
 
 
 
Other current liabilities
 
 
(558
)
 
(835
)
Other non-current liabilities
 
 
(4,455
)
 
(6,405
)
Total derivative liabilities
 
 

($5,013
)
 

($7,240
)
 
 
 
 
 
(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. (a)
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at March 31, 2017 and December 31, 2016, using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
 
March 31, 2017
 
December 31, 2016
Asset (Liability) (a)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
Cash and cash equivalents

$219,357

 

$219,357

 

 

$85,909

 

$85,909

 

Restricted cash (b)
111,276

 
111,276

 

 
71,708

 
71,708

 

Current maturities of long-term debt
(42,926
)
 

 
(43,250
)
 
(31,676
)
 

 
(31,984
)
Long-term debt (c)
(1,028,068
)
 

 
(1,031,648
)
 
(1,030,205
)
 

 
(1,030,708
)
Interest rate swaps (d)
13,858

 

 
13,858

 
11,225

 

 
11,225

Foreign currency exchange contracts (d)
723

 

 
723

 
464

 

 
464

Foreign currency option contracts (d)
350

 

 
350

 
391

 

 
391

 
 
 
 
 
(a)
The Company did not have Level 3 assets or liabilities at March 31, 2017.
(b)
Restricted cash represent the proceeds from like-kind exchange sales deposited with a third-party intermediary and cash held in escrow for a real estate sale. See Note 16Restricted Cash for additional information.
(c)
The carrying amount of long-term debt is presented net of capitalized debt costs on non-revolving debt.
(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.


20


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. Both plans are closed to new participants. Effective December 31, 2016, the Company froze benefits for all employees participating in the pension plan. In lieu of the pension plan, the Company provides those employees with an enhanced 401(k) plan match. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recorded are shown in the following table:
 
Pension
 
Postretirement
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

 

$327

 

$13

 

$2

Interest cost
815

 
869

 
2

 
12

Expected return on plan assets (a)
(945
)
 
(1,008
)
 

 

Amortization of losses (gains)
116

 
629

 

 
(12
)
Net periodic benefit (gain) cost

($14
)
 

$817

 

$15

 

$2

 
 
 
 
 
 
 
 
 
 
 
 
 
(a)
The weighted-average expected long-term rate of return on plan assets used in computing 2017 net periodic benefit cost for pension benefits is 7.2 percent.

14.
OTHER OPERATING INCOME, NET
Other operating income, net comprised the following:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Lease and license income, primarily from hunting
 

$4,110

 

$4,559

Other non-timber income
 
2,798

 
519

Foreign currency income (loss)
 
313

 
(295
)
Gain (loss) on foreign currency exchange and option contracts
 
652

 
(522
)
Gain on foreign currency derivatives (a)
 

 
1,153

Miscellaneous income, net
 
879

 
490

Total
 

$8,752

 

$5,904

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


21


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, 2017 and December 31, 2016, Rayonier’s inventory was solely comprised of finished goods, as follows:
 
March 31, 2017
 
December 31, 2016
Finished goods inventory
 
 
 
Real estate inventory (a)

$19,332

 

$17,059

Log inventory
7,823

 
4,320

Total inventory

$27,155

 

$21,379

 
 
 
 
 
(a)
Represents cost of HBU real estate (including capitalized development investments) expected to be sold within 12
months. See Note 5Higher And Better Use Timberlands And Real Estate Development Investments for additional information.

16.
RESTRICTED CASH
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, 2017 and December 31, 2016, the Company had $111.3 million and $71.7 million, respectively, of proceeds from real estate sales classified as restricted cash which were deposited with an LKE intermediary as well as cash held in escrow for a real estate sale.

17.
ASSETS HELD FOR SALE
As of March 31, 2017, assets held for sale were composed of properties expected to be sold within the next 12 months and meet the other relevant held-for-sale criteria in accordance with ASC 360-10-45-9. As the basis in these properties of $9.0 million was less than the fair value, including costs to sell, no impairment was recognized.


22


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

18.
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The following table summarizes the changes in AOCI by component for the three months ended March 31, 2017 and the year ended December 31, 2016. 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, 2015

($2,450
)
 

$6,271

 

($11,592
)
 

($25,732
)
 

($33,503
)
Other comprehensive income/(loss) before reclassifications
7,387

 

 
22,024

 
3,020

(b)
32,431

Amounts reclassified from accumulated other comprehensive loss

 
(4,606
)
 
583

 
2,513

(c)
(1,510
)
Net other comprehensive income/(loss)
7,387

 
(4,606
)
 
22,607

 
5,533

 
30,921

Recapitalization of New Zealand JV
3,622

 

 
(184
)
 

 
3,438

Balance as of December 31, 2016

$8,559

 

$1,665

 

$10,831

 

($20,199
)
 

$856

Other comprehensive income before reclassifications
2,002

 

 
2,975

(a)

 
4,977

Amounts reclassified from accumulated other comprehensive income

 

 
(404
)
 
116

(c)
(288
)
Net other comprehensive income
2,002

 

 
2,571


116


4,689

Balance as of March 31, 2017

$10,561

 

$1,665

 

$13,402

 

($20,083
)
 

$5,545

 
 
 
 
 
(a)
Includes $2.6 million of other comprehensive gain related to interest rate swaps. See Note 11Derivative Financial Instruments and Hedging Activities for additional information.
(b)
This accumulated other comprehensive income component is comprised of $2.4 million from the annual computation of pension liabilities and a $5.4 million curtailment gain. See Note 15 — Employee Benefit Plans of the 2016 Form 10-K for additional information.
(c)
This component of other comprehensive income is included in the computation of net periodic pension cost. See Note 13Employee Benefit Plans for additional information.

The following table presents details of the amounts reclassified in their entirety from AOCI to net income for the three months ended March 31, 2017 and March 31, 2016:
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other comprehensive income
 
Affected line item in the income statement
 
 
March 31, 2017
 
March 31, 2016
 
 
Realized (gain) loss on foreign currency exchange contracts
 

($446
)
 

$334

 
Other operating income, net
Realized (gain) loss on foreign currency option contracts
 
(282
)
 
554

 
Other operating income, net
Noncontrolling interest
 
168

 
(314
)
 
Comprehensive income (loss) attributable to noncontrolling interest
Income tax (expense) benefit on loss from foreign currency contracts
 
156

 
(161
)
 
Income tax (expense) benefit
Net (gain) loss from accumulated other comprehensive income
 

($404
)
 

$413

 
 

23


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

19.
CONSOLIDATING FINANCIAL STATEMENTS
The condensed consolidating financial information below follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation, and the allocation of certain expenses of Rayonier Inc. incurred for the benefit of its subsidiaries.
In 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 INCOME
 AND COMPREHENSIVE INCOME
 
For the Three Months Ended March 31, 2017
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES

 

 

$186,512

 

 

$186,512

Costs and Expenses
 
 
 
 
 
 
 
 
 
Cost of sales

 

 
136,413

 

 
136,413

Selling and general expenses

 
3,536

 
6,054

 

 
9,590

Other operating expense (income), net

 
111

 
(8,863
)
 

 
(8,752
)
 

 
3,647

 
133,604

 

 
137,251

OPERATING (LOSS) INCOME

 
(3,647
)
 
52,908

 

 
49,261

Interest expense
(3,139
)
 
(4,858
)
 
(418
)
 

 
(8,415
)
Interest and miscellaneous income (expense), net
2,202

 
689

 
(2,373
)
 

 
518

Equity in income from subsidiaries
34,780

 
42,744

 

 
(77,524
)
 

INCOME BEFORE INCOME TAXES
33,843

 
34,928

 
50,117

 
(77,524
)
 
41,364

Income tax expense

 
(148
)
 
(6,133
)
 

 
(6,281
)
NET INCOME
33,843

 
34,780

 
43,984

 
(77,524
)
 
35,083

Less: Net income attributable to noncontrolling interest

 

 
1,240

 

 
1,240

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
33,843

 
34,780

 
42,744

 
(77,524
)
 
33,843

OTHER COMPREHENSIVE INCOME
 
 


 
 
 
 
 
 
Foreign currency translation adjustment, net of income tax
2,002

 

 
2,432

 
(2,002
)
 
2,432

Cash flow hedges, net of income tax
2,572

 
2,633

 
(80
)
 
(2,572
)
 
2,553

Amortization of pension and postretirement plans, net of income tax
116

 
116

 

 
(116
)
 
116

Total other comprehensive income
4,690

 
2,749

 
2,352

 
(4,690
)
 
5,101

COMPREHENSIVE INCOME
38,533

 
37,529

 
46,336

 
(82,214
)
 
40,184

Less: Comprehensive income attributable to noncontrolling interest

 

 
1,651

 

 
1,651

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.

$38,533

 

$37,529

 

$44,685

 

($82,214
)
 

$38,533

 
 
 
 
 
 
 
 
 
 




24


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 INCOME
 AND COMPREHENSIVE INCOME (LOSS)
 
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 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
)
Amortization of pension and postretirement plans, net of income tax
617

 
617

 

 
(617
)
 
617

Total other comprehensive (loss) income
(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