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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 September 30, 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
1 RAYONIER WAY
YULEE, FL 32097
(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 October 27, 2017, there were outstanding 128,931,674 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.
 
 
 
 

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Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
SALES

$177,946

 

$171,421

 

$559,178

 

$567,814

Costs and Expenses
 
 
 
 
 
 
 
Cost of sales
136,583

 
116,624

 
416,683

 
362,790

Selling and general expenses
9,936

 
10,607

 
29,771

 
31,638

Other operating income, net (Note 14)
(7,844
)
 
(5,499
)
 
(22,702
)
 
(20,867
)

138,675

 
121,732

 
423,752

 
373,561

OPERATING INCOME
39,271

 
49,689

 
135,426

 
194,253

Interest expense
(8,553
)
 
(8,544
)
 
(25,600
)
 
(23,603
)
Interest income and miscellaneous income (expense), net
1,128

 
258

 
1,650

 
(1,115
)
INCOME BEFORE INCOME TAXES
31,846

 
41,403

 
111,476

 
169,535

Income tax expense (Note 7)
(3,043
)
 
(779
)
 
(16,817
)
 
(2,274
)
NET INCOME
28,803

 
40,624

 
94,659

 
167,261

Less: Net income attributable to noncontrolling interest
4,115

 
1,269

 
9,968

 
3,613

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
24,688

 
39,355

 
84,691

 
163,648

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of income tax expense of $0, $0, $0 and $0
(7,317
)
 
12,022

 
16,599

 
28,046

Cash flow hedges, net of income tax (expense) benefit of ($614), $229, $534 and $1,293
(2,162
)
 
4,195

 
(1,597
)
 
(22,055
)
Amortization of pension and postretirement plans, net of income tax expense of $0, $0, $0 and $0
116

 
632

 
349

 
1,881

Total other comprehensive (loss) income
(9,363
)
 
16,849

 
15,351

 
7,872

COMPREHENSIVE INCOME
19,440

 
57,473

 
110,010

 
175,133

Less: Comprehensive income attributable to noncontrolling interest
2,289

 
3,649

 
13,537

 
11,808

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.

$17,151

 

$53,824

 

$96,473

 

$163,325

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

$0.19

 

$0.32

 

$0.67

 

$1.34

Diluted earnings per share attributable to Rayonier Inc.

$0.19

 

$0.32

 

$0.67

 

$1.33

 
 
 
 
 
 
 
 
Dividends declared per share

$0.25

 

$0.25

 

$0.75

 

$0.75


See Notes to Consolidated Financial Statements.

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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
September 30, 2017
 
December 31, 2016
ASSETS
CURRENT ASSETS
 
 
 
Cash and cash equivalents

$104,062

 

$85,909

Accounts receivable, less allowance for doubtful accounts of $23 and $33
39,408

 
20,664

Insurance settlement receivable (Note 8)
73,000

 

Inventory (Note 15)
24,497

 
21,379

Prepaid expenses
16,656

 
11,807

Assets held for sale (Note 17)

 
23,171

Other current assets
3,322

 
1,874

Total current assets
260,945

 
164,804

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,492,049

 
2,291,015

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT
     INVESTMENTS (NOTE 5)
79,223

 
70,374

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
3,043

 
2,279

Buildings
24,105

 
7,990

Machinery and equipment
4,449

 
4,658

Construction in progress
1,127

 
8,170

Total property, plant and equipment, gross
32,724

 
23,097

Less — accumulated depreciation
(9,398
)
 
(9,063
)
Total property, plant and equipment, net
23,326

 
14,034

RESTRICTED CASH (NOTE 16)
10,631

 
71,708

OTHER ASSETS
45,545

 
73,825

TOTAL ASSETS

$2,911,719

 

$2,685,760

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$27,692

 

$22,337

Insurance settlement payable (Note 8)
73,000

 

Current maturities of long-term debt (Note 4)

 
31,676

Accrued taxes
7,562

 
2,657

Accrued payroll and benefits
7,331

 
9,277

Accrued interest
8,032

 
5,340

Other current liabilities
26,799

 
20,679

Total current liabilities
150,416

 
91,966

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS (NOTE 4)
1,030,269

 
1,030,205

PENSION AND OTHER POSTRETIREMENT BENEFITS (NOTE 13)
31,431

 
31,856

OTHER NON-CURRENT LIABILITIES
42,369

 
34,981

COMMITMENTS AND CONTINGENCIES (NOTES 6 and 8)

 

SHAREHOLDERS’ EQUITY
 
 
 
Common Shares, 480,000,000 shares authorized, 128,916,631 and 122,904,368 shares issued and outstanding
870,006

 
709,867

Retained earnings
675,911

 
700,887

Accumulated other comprehensive income (Note 18)
12,638

 
856

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,558,555

 
1,411,610

Noncontrolling interest
98,679

 
85,142

TOTAL SHAREHOLDERS’ EQUITY
1,657,234

 
1,496,752

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,911,719

 

$2,685,760


See Notes to Consolidated Financial Statements.

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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

 

 
84,691

 

 
9,968

 
94,659

Dividends ($0.75 per share)

 

 
(95,302
)
 

 

 
(95,302
)
Issuance of shares under incentive stock plans
262,561

 
3,665

 

 

 

 
3,665

Stock-based compensation

 
4,084

 

 

 

 
4,084

Repurchase of common shares
(298
)
 

 

 

 

 

Amortization of pension and postretirement plan liabilities

 

 

 
349

 

 
349

Foreign currency translation adjustment

 

 

 
13,335

 
3,264

 
16,599

Cash flow hedges

 

 

 
(1,902
)
 
305

 
(1,597
)
Issuance of shares under equity offering, net of costs
5,750,000

 
152,390

 

 

 

 
152,390

Balance, September 30, 2017
128,916,631

 

$870,006

 

$675,911

 

$12,638

 

$98,679

 

$1,657,234


See Notes to Consolidated Financial Statements.















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RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
Net income

$94,659

 

$167,261

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
96,602

 
83,685

Non-cash cost of land and improved development
8,631

 
10,111

Stock-based incentive compensation expense
4,084

 
3,894

Deferred income taxes
16,714

 
4,472

Amortization of losses from pension and postretirement plans
349

 
1,881

Gain on sale of large disposition of timberlands
(28,183
)
 
(101,325
)
Other
29

 
(251
)
Changes in operating assets and liabilities:
 
 
 
Receivables
(18,639
)
 
(3,897
)
Inventories
(617
)
 
(4,591
)
Accounts payable
5,018

 
583

Income tax receivable/payable
(126
)
 
(47
)
All other operating activities
8,352

 
2,132

CASH PROVIDED BY OPERATING ACTIVITIES
186,873

 
163,908

INVESTING ACTIVITIES
 
 
 
Capital expenditures
(45,731
)
 
(40,246
)
Real estate development investments
(11,780
)
 
(4,815
)
Purchase of timberlands
(239,052
)
 
(353,828
)
Assets purchased in business acquisition

 
(1,113
)
Net proceeds from large disposition of timberlands
42,029

 
126,965

Rayonier office building under construction
(5,979
)
 
(3,933
)
Change in restricted cash
61,078

 
22,430

Other
383

 
444

CASH USED FOR INVESTING ACTIVITIES
(199,052
)
 
(254,096
)
FINANCING ACTIVITIES
 
 
 
Issuance of debt
63,389

 
694,096

Repayment of debt
(95,216
)
 
(454,419
)
Dividends paid
(95,008
)
 
(92,095
)
Proceeds from the issuance of common shares under incentive stock plan
3,665

 
889

Proceeds from the issuance of common shares from equity offering, net of costs
152,390

 

Repurchase of common shares made under share repurchase program

 
(690
)
Debt issuance costs

 
(818
)
Other

 
(139
)
CASH PROVIDED BY FINANCING ACTIVITIES
29,220

 
146,824

EFFECT OF EXCHANGE RATE CHANGES ON CASH
1,112

 
1,626

CASH AND CASH EQUIVALENTS
 
 
 
Change in cash and cash equivalents
18,153

 
58,262

Balance, beginning of year
85,909

 
51,777

Balance, end of period

$104,062

 

$110,039

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

$23,485

 

$23,540

Income taxes
513

 
495

Non-cash investing activity:
 
 
 
Capital assets purchased on account
4,575

 
4,376

 
 
 
 
 
(a)
Interest paid is presented net of patronage payments received of $3.0 million and $0.4 million for the nine months ended September 30, 2017 and September 30, 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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RAYONIER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands unless otherwise stated)


1.
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”).
Summary of Significant Accounting Policies
Investment in Real Estate
The Company capitalizes costs directly and indirectly associated with development of identified real estate projects. Direct costs include land and common development costs (such as roads, utilities and amenities), and capitalized property taxes. Indirect costs include administration, legal fees, capitalized interest, and project administration to the extent that such costs are related to a specific project. Interest is capitalized based on the amount of underlying expenditures of real estate projects under development.
Revenue Recognition for Real Estate Sales
The Company generally recognizes revenue on sales of real estate using the full accrual method at closing, when cash has been received, title and risk of loss have passed to the buyer and there is no continuing involvement with the property. Revenue is recognized using the percentage-of-completion method on sales of real estate containing future performance obligations. Cost of sales associated with real estate sold includes the cost of the land, the cost of any timber on the property that was conveyed to the buyer, any real estate development costs and any closing costs including sales commissions that may be borne by the Company.
When developed residential or commercial land is sold, the cost of sales includes actual costs incurred and estimates of future development costs benefiting the property sold through completion. When developed land is sold, costs are allocated to each sold unit or lot based upon the relative sales value. For purposes of allocating development costs, estimates of future revenues and development costs are re-evaluated periodically throughout the year, with adjustments being allocated prospectively to the remaining units available for sale.
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 during the first quarter ended March 31, 2017. 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” 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 Consolidated Statements of Cash Flows. The adoption of this standard did not have a material impact 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)

New Accounting Standards
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires that an employer report the service cost component of net periodic benefit cost in the Consolidated Statements of Income in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. Additionally, the other components of net periodic benefit cost (interest cost, expected return on plan assets and amortization of losses or gains) are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. If a separate line item is used to present the other components of net benefit cost, that line item must be appropriately described. If a separate line item is not used, the line item used in the income statement to present the other components of net benefit cost must be disclosed. ASU No. 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. ASU No. 2017-07 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Rayonier intends to adopt ASU No. 2017-07 in the Company’s first quarter 2018 Form 10-Q. Interest cost, expected return on plan assets and amortization of losses or gains are currently recorded in “Selling and general expenses” and “Cost of sales” in the Consolidated Statements of Income and “Timber and timberlands, net of depletion and amortization” in the Consolidated Balance Sheets. Upon adoption, these components of net period benefit cost will be recorded in “Interest income and miscellaneous income (expense), net.” As the Company froze benefits for all employees participating in the pension plan effective December 31, 2016, the service cost component of net period benefit is no longer recognized by Rayonier. Based on current actuarial estimates and management assumptions, Rayonier anticipates that the adoption of this standard will not have a significant impact on the Company’s consolidated financial statements. See Note 13Employee Benefit Plans for the components of net periodic benefit cost.
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 Consolidated Statements of Cash Flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU No. 2016-18 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Rayonier intends to adopt ASU No. 2016-18 in the Company’s first quarter 2018 Form 10-Q. The Company currently records changes in restricted cash within the investing section of the Consolidated Statements of Cash Flows. Upon adoption, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Consolidated Statements of Cash Flows and therefore changes in restricted cash will not be reported as cash flow activities. Rayonier will continue to disclose the nature of restrictions on the Company’s cash, cash equivalents, and restricted cash. See Note 16Restricted Cash for additional information.
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 Consolidated Statements 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 anticipates the adoption of this standard will not have a significant impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which currently 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 on a modified retrospective basis beginning at the earliest period presented. 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 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, non-cash 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 expects to adopt using the cumulative-effect method.
As of September 30, 2017, and subject to the Company’s ongoing evaluation of new transactions and contracts, Rayonier has substantially completed its evaluation of the expected impact of adopting Topic 606 and anticipates that the adoption of this standard will not have a significant impact on the Company’s consolidated financial statements aside from adding expanded disclosures. Rayonier is also currently identifying and implementing appropriate changes to its business processes, systems and controls to support revenue recognition and disclosures under Topic 606. A material change in controls over financial reporting is not anticipated.
Subsequent Events
The Company has evaluated events occurring from September 30, 2017 to the date of issuance for potential recognition or disclosure in the consolidated financial statements. No events were identified that warranted recognition. See Note 8Contingencies for events that warranted disclosure.    

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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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 and nine months ended September 30, 2017 and 2016:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
SALES
2017
 
2016
 
2017
 
2016
Southern Timber

$31,897

 

$27,826

 

$95,390

 

$102,205

Pacific Northwest Timber
18,644

 
16,139

 
62,887

 
52,316

New Zealand Timber
69,913

 
42,179

 
187,817

 
125,951

Real Estate (a)
17,240

 
60,626

 
97,149

 
211,296

Trading
40,252

 
24,651

 
115,935

 
76,046

Total

$177,946

 

$171,421

 

$559,178

 

$567,814

 
 
 
 
 
(a)
The nine months ended September 30, 2017 and September 30, 2016 include Large Dispositions of $42.0 million and $129.5 million, respectively.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
OPERATING INCOME (LOSS)
2017
 
2016
 
2017
 
2016
Southern Timber

$11,436

 

$8,183

 

$35,031

 

$34,976

Pacific Northwest Timber
1,134

 
(3,293
)
 
(1,278
)
 
(874
)
New Zealand Timber
19,280

 
6,613

 
56,327

 
21,385

Real Estate (a)
11,437

 
43,078

 
57,235

 
152,997

Trading
1,142

 
481

 
3,380

 
1,456

Corporate and other
(5,158
)
 
(5,373
)
 
(15,269
)
 
(15,687
)
Total Operating Income
39,271

 
49,689

 
135,426

 
194,253

Unallocated interest expense and other
(7,425
)
 
(8,286
)
 
(23,950
)
 
(24,718
)
Total Income before Income Taxes

$31,846

 

$41,403

 

$111,476

 

$169,535

 
 
 
 
 
(a)
The nine months ended September 30, 2017 and September 30, 2016 include Large Dispositions of $28.2 million and $101.3 million, respectively.

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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
September 30,
 
Nine Months Ended
September 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2017
 
2016
 
2017
 
2016
Southern Timber

$12,736

 

$9,988

 

$37,092

 

$37,102

Pacific Northwest Timber
6,481

 
6,668

 
23,766

 
14,978

New Zealand Timber (a)
8,478

 
5,956

 
29,341

 
17,252

Real Estate (b)
735

 
9,260

 
14,038

 
35,988

Trading

 

 

 

Corporate and other
277

 
106

 
469

 
298

Total

$28,707

 

$31,978

 

$104,706

 

$105,618

 
 
 
 
 
(a)
The nine months ended September 30, 2017 includes $8.9 million of timber cost basis expensed in conjunction with a timberland sale.
(b)
The nine months ended September 30, 2017 and September 30, 2016 include Large Dispositions of $8.1 million and $21.9 million, respectively.    
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
NON-CASH COST OF LAND AND IMPROVED DEVELOPMENT
2017
 
2016
 
2017
 
2016
Southern Timber

 

 

 

Pacific Northwest Timber

 

 

 

New Zealand Timber

 

 
128

 
1,824

Real Estate (a)
1,272

 
4,336

 
14,246

 
10,092

Trading

 

 

 

Total

$1,272

 

$4,336

 

$14,374

 

$11,916

 
 
 
 
 
(a)
The nine months ended September 30, 2017 and September 30, 2016 include Large Dispositions of $5.7 million and $1.8 million, respectively.

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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 September 30, 2017:
 
September 30, 2017
Term Credit Agreement borrowings due 2024 at a variable interest rate of 2.9% at September 30, 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 3.1% at September 30, 2017 (b)
300,000

Revolving Credit Facility borrowings due 2020 at an average variable interest rate of 2.5% at September 30, 2017
50,000

New Zealand JV noncontrolling interest shareholder loan at 0% interest rate
8,406

Total debt
1,033,406

Less: Deferred financing costs
(3,137
)
Long-term debt, net of deferred financing costs

$1,030,269

 
 
 
 
 
(a)
As of September 30, 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 September 30, 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

2018

2019

2020
50,000

2021

Thereafter
983,406

Total Debt

$1,033,406

2017 Debt Activity
During the nine months ended September 30, 2017, the Company made additional borrowings of $25.0 million on the Revolving Credit Facility. A draw of $15.0 million during the first quarter was used to repay the $15.0 million solid waste bonds that were due in 2020 and an additional draw of $10.0 million made in the second quarter was used to partially fund the acquisition of 91,000 acres in coastal Florida, Georgia and South Carolina. In the third quarter, the Company used available cash to repay $31.5 million of mortgage notes which were due in August 2017. As of September 30, 2017, the Company had available borrowings of $139.6 million under the Revolving Credit Facility, net of $10.4 million to secure its outstanding letters of credit.
In addition, the New Zealand JV made borrowings and repayments of $38.4 million on its working capital facility. As of September 30, 2017, draws totaling NZ$40.0 million remain available on the working capital facility. The New Zealand JV also repaid $10.9 million of its shareholder loan held by the non-controlling interest party during the nine months ended September 30, 2017. Changes in exchange rates increased debt on a U.S. dollar basis for its shareholder loan by $0.5 million during the nine months ended September 30, 2017.

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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 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 September 30, 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 investments from December 31, 2016 to September 30, 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
(1,579
)
 
(604
)
 
(2,183
)
Timber depletion from harvesting activities and basis of timber sold in real estate sales
(1,979
)
 

 
(1,979
)
Capitalized real estate development investments (b)

 
11,780

 
11,780

Capital expenditures (silviculture)
195

 

 
195

Intersegment transfers
4,142

 
(762
)
 
3,380

Total Balance at September 30, 2017
65,831

 
32,795

 
98,626

Less: Current portion (a)
(6,024
)
 
(13,379
)
 
(19,403
)
Non-current portion at September 30, 2017

$59,807

 

$19,416

 

$79,223

 
 
 
 
 
(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 $0.3 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 September 30, 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

$312

 

$3,533

 

$4,813

 

$8,658

2018
1,130

 
9,271

 
6,901

 
17,302

2019
907

 
8,796

 
5,589

 
15,292

2020
724

 
8,391

 
5,510

 
14,625

2021
625

 
8,450

 
4,905

 
13,980

Thereafter (c)
1,230

 
153,753

 
12,737

 
167,720

 

$4,928

 

$192,194

 

$40,455

 

$237,577

 
 
 
 
 
(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 and Wildlight development project.
(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 September 30, 2017, the New Zealand JV has four CFL’s under termination notice that are currently being relinquished as harvest activities are concluding, 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 and nine months ended September 30, 2017, the Company recorded income tax expense of $3.0 million and $16.8 million, respectively. For the three and nine months ended September 30, 2016, the Company recorded income tax expense of $0.8 million and $2.3 million, respectively.

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”) as of September 30, 2017 and September 30, 2016 was 15.1% and 1.3%, respectively. The increase in income tax expense and the corresponding AETR for the three and nine months ended September 30, 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 and nine months ended September 30, 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

In re Rayonier Inc. Securities Litigation

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. On 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 Settlement Agreement included the material terms contained in the term sheet executed on March 13. Pursuant to the terms of the Settlement Agreement, which was 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 (the “Settlement Fund”). The insurance carriers fully funded the Settlement Fund by deposits in an escrow account as required by the Settlement Agreement. On September 19, 2017, the court held the final fairness hearing as to the settlement. The amounts agreed to on March 13, 2017, including the realized amount funded by the insurance carriers, were reflected in the Company’s Consolidated Financial Statements as of September 30, 2017. On October 5, 2017, the court entered orders approving the settlement and plan of distribution, dismissing the case against all defendants with prejudice and awarding Plaintiffs’ counsel certain fees and cost reimbursements to be paid from the Settlement Fund.


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

Derivative Claims

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 (“Derivative Claims”). 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. On October 13, 2017, counsel for all five shareholders involved in the Derivative Claims filed a complaint in the name of one of the shareholders from whom the Company received a request to investigate. That case is pending in the United States District Court for the Middle District of Florida and is styled Molloy v. Boynton, et al., Civil Action No. 3:17-cv-01157-TJC-MCR. The complaint alleges breaches of fiduciary duties and unjust enrichment and names as defendants, former officers Paul G. Boynton, Hans E. Vanden Noort and N. Lynn Wilson, and former directors C. David Brown, II, Mark E. Gaumond, James H. Miller, Thomas I. Morgan and Ronald Townsend.

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 large deductible insurance plans, primarily in the areas of executive risk, property, automobile 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 September 30, 2017, the following financial guarantees were outstanding:
Financial Commitments
 
Maximum Potential
Payment
 
Carrying Amount
of Associated Liability
Standby letters of credit (a)
 

$10,353

 

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
1,304

 

Total financial commitments
 

$13,911

 

$43

 
 
 
 
 
(a)
Approximately $9.2 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 2018 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 September 30, 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 outstanding claims under the Company’s previous workers’ compensation self-insurance programs in Washington and Florida. 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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net Income

$28,803

 

$40,624

 

$94,659

 

$167,261

Less: Net income attributable to noncontrolling interest
4,115

 
1,269

 
9,968

 
3,613

Net income attributable to Rayonier Inc.

$24,688

 

$39,355

 

$84,691

 

$163,648

 
 
 
 
 
 
 
 
Shares used for determining basic earnings per common share
128,610,696

 
122,597,927

 
126,934,003

 
122,574,094

Dilutive effect of:
 
 
 
 
 
 
 
Stock options
84,380

 
113,849

 
94,528

 
88,594

Performance and restricted shares
270,704

 
170,857

 
315,475

 
120,212

Shares used for determining diluted earnings per common share
128,965,780

 
122,882,633

 
127,344,006

 
122,782,900

 
 
 
 
 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:

$0.19

 

$0.32

 

$0.67

 

$1.34

 
 
 
 
 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:

$0.19

 

$0.32

 

$0.67

 

$1.33


 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Anti-dilutive shares excluded from the computations of diluted earnings per share:
 
 
 
 
 
 
 
Stock options, performance and restricted shares
621,447

 
745,878

 
600,039

 
863,244

Total
621,447

 
745,878

 
600,039

 
863,244




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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 September 30, 2017, foreign currency exchange contracts and foreign currency option contracts had maturity dates through February 2019 and October 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.
The New Zealand JV is exposed to foreign currency risk when making shareholder loan payments which are denominated in U.S. dollars. 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. For the three and nine months ended September 30, 2017, the change in fair value of the foreign exchange forward contracts of $0.6 million and $0.3 million, respectively, was recorded in “Interest income and miscellaneous income (expense), net” as the contracts did not qualify for hedge accounting treatment. As of September 30, 2017, foreign exchange forward contracts had maturity dates through March 2018.
For additional information on the shareholder loan see Note 4Debt.
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 1.625%, 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 1.625%, 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 and nine months ended September 30, 2017 and 2016.
 
 
 
Three Months Ended
September 30,
 
Income Statement Location
 
2017
 
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive (loss) income
 

($1,579
)
 

$259

Foreign currency option contracts
Other comprehensive (loss) income
 
(716
)
 
635

Interest rate swaps
Other comprehensive (loss) income
 
(533
)
 
3,529

 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
Foreign currency exchange contracts
Interest income and miscellaneous income (expense), net
 
609

 

 
 
 
Nine Months Ended
September 30,
 
Income Statement Location
 
2017
 
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive (loss) income
 

$1,611

 

$2,075

Foreign currency option contracts
Other comprehensive (loss) income
 
219

 
2,564

Interest rate swaps
Other comprehensive (loss) income
 
(2,921
)
 
(25,459
)
 
 
 
 
 
 
Derivatives designated as a net investment hedge:
 
 
 
 
 
Foreign currency exchange contract
Other comprehensive (loss) income
 

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

 
895

 
Interest income and miscellaneous income (expense), net
 
283

 

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 September 30, 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 $2.0 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
 
September 30, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$55,100

 

$44,800

Foreign currency option contracts
58,000

 
91,000

Interest rate swaps
650,000

 
650,000

 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
Foreign currency exchange contracts
18,020

 

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)
 
 
 
September 30, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 

$2,145

 

$692

 
Other assets
 
173

 
33

 
Other current liabilities
 
(12
)
 
(261
)
Foreign currency option contracts
Other current assets
 
753

 
1,064

 
Other assets
 
56

 
327

 
Other current liabilities
 
(173
)
 
(574
)
 
Other non-current liabilities
 
(17
)
 
(426
)
Interest rate swaps
Other assets
 
14,606

 
17,204

 
Other non-current liabilities
 
(6,302
)
 
(5,979
)
 
 
 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 
269

 

 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Other current assets
 
 

$3,167

 

$1,756

Other assets
 
 
14,835

 
17,564

Total derivative assets
 
 

$18,002

 

$19,320

 
 
 
 
 
 
Other current liabilities
 
 
(185
)
 
(835
)
Other non-current liabilities
 
 
(6,319
)
 
(6,405
)
Total derivative liabilities
 
 

($6,504
)
 

($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 September 30, 2017 and December 31, 2016, using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
 
September 30, 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

$104,062

 

$104,062

 

 

$85,909

 

$85,909

 

Restricted cash (b)
10,631

 
10,631

 

 
71,708

 
71,708

 

Current maturities of long-term debt

 

 

 
(31,676
)
 

 
(31,984
)
Long-term debt (c)
(1,030,269
)
 

 
(1,042,766
)
 
(1,030,205
)
 

 
(1,030,708
)
Interest rate swaps (d)
8,304

 

 
8,304

 
11,225

 

 
11,225

Foreign currency exchange contracts (d)
2,575

 

 
2,575

 
464

 

 
464

Foreign currency option contracts (d)
619

 

 
619

 
391

 

 
391

 
 
 
 
 
(a)
The Company did not have Level 3 assets or liabilities at September 30, 2017.
(b)
Restricted cash represents 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.


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

13.
EMPLOYEE BENEFIT PLANS
The Company has one qualified non-contributory defined benefit pension plan covering a portion of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plan. 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
September 30,
 
Three Months Ended
September 30,
 
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
116

 
632

 

 

Net periodic benefit (gain) cost

($14
)
 

$820

 

$15

 

$14

 
 
 
 
 
 
 
 
 
Pension
 
Postretirement
 
Nine Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

 

$980

 

$39

 

$5

Interest cost
2,444

 
2,606

 
5

 
36

Expected return on plan assets (a)
(2,836
)
 
(3,023
)
 

 

Amortization of losses (gains)
349

 
1,893

 

 
(12
)
Net periodic benefit (gain) cost

($43
)
 

$2,456

 

$44

 

$29

 
 
 
 
 
 
 
 
 
 
 
 
 
(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%.

14.
OTHER OPERATING INCOME, NET
Other operating income, net comprised the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Lease and license income, primarily from hunting

$4,331

 

$3,769

 

$12,419

 

$13,991

Other non-timber income
1,312

 
666

 
5,485

 
1,721

Foreign currency income
165

 
533

 
15

 
34

(Loss) gain on sale or disposal of property and equipment
(63
)
 
58

 
(69
)
 
81

Gain (loss) on foreign currency exchange and option contracts
1,295

 
(333
)
 
2,476

 
(1,406
)
Deferred payment related to a prior land sale

 

 

 
4,000

Costs related to acquisition

 
(91
)
 

 
(1,306
)
Gain on foreign currency derivatives (a)

 

 

 
1,153

Log trading agency and marketing fees
823

 
637

 
1,949

 
1,568

Gain on sale of carbon credits

 
359

 

 
1,113

Miscellaneous (expense) income, net
(19
)
 
(99
)
 
427

 
(82
)
Total

$7,844

 

$5,499

 

$22,702

 

$20,867

 
 
 
 
 
(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.

15.
INVENTORY
As of September 30, 2017 and December 31, 2016, Rayonier’s inventory was solely comprised of finished goods, as follows:
 
September 30, 2017
 
December 31, 2016
Finished goods inventory
 
 
 
Real estate inventory (a)

$19,403

 

$17,059

Log inventory
5,094

 
4,320

Total inventory

$24,497

 

$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 September 30, 2017 and December 31, 2016, the Company had $10.6 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
Assets held for sale are 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 of September 30, 2017, there were no properties identified that met this classification. As of December 31, 2016, the basis in properties meeting this classification was $23.2 million. Since the basis in these properties was less than the fair value, including costs to sell, no impairment was recognized.


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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)

18.
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The following table summarizes the changes in AOCI by component for the nine months ended September 30, 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 before reclassifications
7,387

 

 
22,024

 
3,020

(b)
32,431

Amounts reclassified from accumulated other comprehensive income

 
(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
13,335

 

 
202

(a)

 
13,537

Amounts reclassified from accumulated other comprehensive income

 

 
(2,104
)
 
349

(c)
(1,755
)
Net other comprehensive income/(loss)
13,335

 

 
(1,902
)

349


11,782

Balance as of September 30, 2017

$21,894

 

$1,665

 

$8,929

 

($19,850
)
 

$12,638

 
 
 
 
 
(a)
Includes $2.9 million of other comprehensive loss 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 nine months ended September 30, 2017 and September 30, 2016:
Details about accumulated other comprehensive income components
 
Amount reclassified from accumulated other comprehensive income
 
Affected line item in the income statement
 
 
September 30, 2017
 
September 30, 2016
 
 
Realized (gain) loss on foreign currency exchange contracts
 

($2,928
)
 

$43

 
Other operating income, net
Realized (gain) loss on foreign currency option contracts
 
(867
)
 
502

 
Other operating income, net
Noncontrolling interest
 
873

 
(235
)
 
Comprehensive income attributable to noncontrolling interest
Income tax expense (benefit) from (gain) loss on foreign currency contracts
 
818

 
(87
)
 
Income tax expense
Net (gain) loss from accumulated other comprehensive income
 

($2,104
)
 

$223

 
 

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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)

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 September 30, 2017
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES

 

 

$177,946