10-Q
Table of Contents




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from              to             
Commission File Number 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
225 WATER STREET, SUITE 1400
JACKSONVILLE, FL 32202
(Principal Executive Office)
Telephone Number: (904) 357-9100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x        NO  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x       NO  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
Non-accelerated filer  o
  
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o        NO  x

As of April 29, 2016, there were outstanding 122,822,111 Common Shares of the registrant.


















Table of Contents

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

i


Table of Contents

PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
SALES
 

$134,843

 

$140,305

Costs and Expenses
 
 
 
 
Cost of sales
 
107,971

 
107,234

Selling and general expenses
 
9,779

 
10,898

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

 
112,558

OPERATING INCOME
 
22,997

 
27,747

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

 
17,709

Income tax benefit
 
781

 
471

NET INCOME
 
15,058

 
18,180

Less: Net income attributable to noncontrolling interest
 
586

 
433

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
 
14,472

 
17,747

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

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

 
781

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

 
3,692

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

$8,454

 

$7,483

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

$0.12

 

$0.14

Diluted earnings per share attributable to Rayonier Inc.
 

$0.12

 

$0.14

 
 
 
 
 
Dividends declared per share
 

$0.25

 

$0.25


See Notes to Consolidated Financial Statements.

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Table of Contents

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

$76,204

 

$51,777

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

 
20,222

Inventory (Note 15)
17,443

 
15,351

Prepaid expenses
12,890

 
12,654

Other current assets
1,177

 
5,681

Total current assets
135,211

 
105,685

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

 
2,066,780

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

 
65,450

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
1,833

 
1,833

Buildings
9,024

 
9,014

Machinery and equipment
3,689

 
3,686

Construction in progress
1,638

 
1,282

Total property, plant and equipment, gross
16,184

 
15,815

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

 
6,742

OTHER ASSETS
59,782

 
71,281

TOTAL ASSETS

$2,332,137

 

$2,315,938

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$22,242

 

$21,479

Current maturities of long-term debt
12,211

 

Accrued taxes
4,076

 
3,685

Accrued payroll and benefits
3,317

 
7,037

Accrued interest
7,373

 
6,153

Other current liabilities
19,089

 
21,103

Total current liabilities
68,308

 
59,457

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

 
830,554

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

 
34,137

OTHER NON-CURRENT LIABILITIES
36,307

 
30,050

COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)

 

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

 
708,827

Retained earnings
595,851

 
612,760

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

 
1,288,084

Noncontrolling interest
79,336

 
73,656

TOTAL SHAREHOLDERS’ EQUITY
1,335,780

 
1,361,740

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,332,137

 

$2,315,938


See Notes to Consolidated Financial Statements.

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Table of Contents




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


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

 

$702,598

 

$790,697

 

($4,825
)
 

$86,681

 

$1,575,151

Net income (loss)

 

 
46,165

 

 
(2,224
)
 
43,941

Dividends ($1.00 per share)

 

 
(124,943
)
 

 

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

 
2,117

 

 

 

 
2,117

Stock-based compensation

 
4,484

 

 

 

 
4,484

Tax deficiency on stock-based compensation

 
(250
)
 

 

 

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

 

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

 

 

 
2,933

 

 
2,933

Adjustments to Rayonier Advanced Materials

 

 
841

 

 

 
841

Foreign currency translation adjustment

 

 

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

 

 

 
(10,044
)
 
83

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

 

$708,827

 

$612,760

 

($33,503
)
 

$73,656

 

$1,361,740

Net income

 

 
14,472

 

 
586

 
15,058

Dividends ($0.25 per share)

 

 
(30,691
)
 

 

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

 
18

 

 

 

 
18

Stock-based compensation

 
839

 

 

 

 
839

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

 

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

 

 

 
617

 

 
617

Foreign currency translation adjustment

 

 

 
(210
)
 
3,014

 
2,804

Cash flow hedges

 


 

 
(13,923
)
 
149

 
(13,774
)
Recapitalization of New Zealand Joint Venture

 
(5,398
)
 

 
3,438

 
1,960

 

Recapitalization costs

 
(96
)
 

 

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

 

$704,174

 

$595,851

 

($43,581
)
 

$79,336

 

$1,335,780


See Notes to Consolidated Financial Statements.















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Table of Contents

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
 
Three Months Ended March 31,
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
Net income

$15,058

 

$18,180

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

 
29,975

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

 
3,747

Stock-based incentive compensation expense
839

 
805

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

 
939

Other
(1,081
)
 
40

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

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

 
2,857

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

 
53,398

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

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

 
12,000

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

 
546

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

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

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

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

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

 
161,558

Balance, end of period

$76,204

 

$139,049

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

$5,808

 

$5,016

Income taxes
119

 
138

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

 
2,441

 
 
 
 
 
(a)
Interest paid is presented net of patronage refunds received of $0.4 million and $1.3 million for the three months ended March 31, 2016 and March 31, 2015, respectively. For additional information on patronage refunds, see Note 5 Debt in the 2015 Form 10-K.

See Notes to Consolidated Financial Statements.

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Table of Contents

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


1.
BASIS OF PRESENTATION
Basis of Presentation
The unaudited consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries (“Rayonier” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC (the “2015 Form 10-K”).
Reclassifications
Certain 2015 amounts have been reclassified to conform with the current year presentation, including changes in balance sheet presentation. During the first quarter of 2016, the Company reclassified capitalized debt costs related to non-revolving debt from Other Assets to Long Term Debt as a result of the adoption of ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-50) - Simplifying the Presentation of Debt Issuance Costs, which is required to be applied on a retrospective basis. This reclassification is reflected in the March 31, 2016 and December 31, 2015 Consolidated Balance Sheets. A corresponding change has also been made to the Consolidated Statement of Cash Flows for both periods presented.
New Accounting Standards
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016 , and interim periods within those annual periods. Rayonier intends to adopt ASU No. 2016-09 in the Company’s first quarter 2017 Form 10-Q. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU No. 2016-05 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Rayonier intends to adopt ASU No. 2016-05 in the Company’s first quarter 2017 Form 10-Q filing, which the Company does not expect will have an impact on the consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. ASU No. 2016-02 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

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

In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that will supersede current revenue recognition guidance. The guidance provides a unified model to determine when and how revenue is recognized and will require enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date. ASU No. 2015-14 provides a one-year deferral of the effective date of the new standard, with an option for organizations to adopt early based on the original effective date.  In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers—Identifying Performance Obligations and Licensing. The new standard clarifies the guidance for identifying performance obligations. This standard will be effective for Rayonier beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements and has completed a preliminary analysis of the specific impacts to our New Zealand Timber segment.

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

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


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

3.
SEGMENT AND GEOGRAPHICAL INFORMATION
Sales between operating segments are made based on estimated fair market value and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on segment operating income and Adjusted EBITDA. Asset information is not reported by segment, as the company does not produce asset information by segment internally.
Operating income as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income. Certain income (loss) items in the Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations and are included under “Corporate and other.”
Segment information for the three months ended March 31, 2016 and 2015 were as follows:
 
Three Months Ended
March 31,
SALES
2016
 
2015
Southern Timber

$44,740

 

$35,531

Pacific Northwest Timber
19,309

 
19,154

New Zealand Timber
36,023

 
41,194

Real Estate
13,363

 
23,791

Trading
21,408

 
20,635

Total

$134,843

 

$140,305

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

$15,753

 

$12,413

Pacific Northwest Timber
1,385

 
2,587

New Zealand Timber
4,744

 
5,694

Real Estate
4,225

 
12,582

Trading
350

 
270

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

 
27,747

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

$14,277

 

$17,709

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

$16,556

 

$14,301

Pacific Northwest Timber
4,639

 
3,790

New Zealand Timber
4,860

 
8,003

Real Estate
3,203

 
3,812

Trading

 

Corporate and other
84

 
69

Total

$29,342

 

$29,975


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

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

 

Pacific Northwest Timber

 

New Zealand Timber
1,824

 

Real Estate
2,284

 
3,747

Trading

 

Corporate and other

 

Total

$4,108

 

$3,747


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

$325,000

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

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

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

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

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

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

Total debt
872,843

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

$857,429

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

$12,211

2017 (a)
42,000

2018

2019

2020
120,000

Thereafter
698,095

Total Debt

$872,306

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

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

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

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

Rayonier continuously assesses potential alternative uses of its timberlands, as some properties may become more valuable for development, residential, recreation or other purposes. The Company periodically transfers, via a sale or contribution from the REIT to TRS, HBU timberlands to enable land-use entitlement, development or marketing activities. The Company also acquires HBU properties in connection with timberland acquisitions. These properties are managed as timberlands until sold or developed. While the majority of HBU sales involve rural and recreational land, the Company also selectively pursues various land-use entitlements on certain properties for residential, commercial and industrial development in order to enhance the long-term value of such properties. For selected development properties, Rayonier also invests in targeted infrastructure improvements, such as roadways and utilities, to accelerate the marketability and improve the value of such properties.

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

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

$57,897

 

$7,553

 

$65,450

Plus: Current portion (a)
6,019

 
6,233

 
12,252

Total Balance at December 31, 2015
63,916

 
13,786

 
77,702

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

 
(467
)
Capitalized real estate development investments

 
1,685

 
1,685

Capital expenditures (silviculture)
50

 

 
50

Intersegment transfers
4

 

 
4

Total Balance at March 31, 2016
62,964

 
15,332

 
78,296

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

$56,309

 

$10,309

 

$66,618

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

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

$1,449

 

$7,262

 

$3,512

 

$12,223

2017
1,473

 
10,772

 
3,358

 
15,603

2018
763

 
9,275

 
3,163

 
13,201

2019
620

 
8,789

 
3,163

 
12,572

2020
534

 
8,348

 
3,163

 
12,045

Thereafter (c)
1,613

 
158,766

 
10,724

 
171,103

 

$6,452

 

$203,212

 

$27,083

 

$236,747

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

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

7.
INCOME TAXES
The operations conducted by the Company’s real estate investment trust (“REIT”) entities are generally not subject to U.S. federal and state income tax. The New Zealand JV is subject to corporate level tax in New Zealand. Non-REIT qualifying operations are conducted by the Company’s taxable REIT subsidiaries (“TRS”). The primary businesses performed in Rayonier’s taxable REIT subsidiaries include log trading and certain real estate activities, such as the sale and entitlement of development HBU properties.
Provision for Income Taxes
The Company’s effective tax rate is below the 35.0% U.S. statutory rate due to tax benefits associated with being a REIT. The income tax benefits for the three months ended March 31, 2016 and 2015 are principally related to the New Zealand JV.
The table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented:
 
Three Months Ended March 31,
 
2016
 
2015
Income tax expense at federal statutory rate

($4,997
)
 
35.0
 %
 

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

 
(30.6
)
 
7,502

 
(42.4
)
Foreign TRS operations
117

 
(0.8
)
 
1,137

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

 
(1,812
)
 
10.2

Other
(80
)
 
0.6

 
(158
)
 
0.9

Income tax (expense) benefit before discrete items

($1,052
)
 
7.4
 %
 

$471

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

 
(12.9
)
 

 

Income tax benefit as reported

$781

 
(5.5
)%
 

$471

 
(2.7
)%

8.
CONTINGENCIES

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

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

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

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

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

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

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

On January 9, 2015, the five securities actions were consolidated into one putative class action entitled In re Rayonier Inc. Securities Litigation, Case No. 3:14-cv-01395-TJC-JBT, in the United States District Court for the Middle District of Florida. The plaintiffs alleged that the defendants made false and/or misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs sought unspecified monetary damages and attorneys’ fees and costs. Two shareholders, the Pension Trust Fund for Operating Engineers and the Lake Worth Firefighters’ Pension Trust Fund moved for appointment as lead plaintiff on January 12, 2015, which was granted on February 25, 2015. On April 7, 2015, the plaintiffs filed a Consolidated Class Action Complaint (the “Consolidated Complaint”). In the Consolidated Complaint, plaintiffs added allegations as to and added as a defendant N. Lynn Wilson, a former officer of Rayonier. With the filing of the Consolidated Complaint, David L. Nunes and H. Edwin Kiker were dropped from the case as defendants. Defendants timely filed Motions to Dismiss the Consolidated Complaint on May 15, 2015. After oral argument on Defendants' motions on August 25, 2015, the Court dismissed the Consolidated Complaint without prejudice, allowing plaintiffs leave to refile. Plaintiffs filed the Amended Consolidated Class Action Complaint (the “Amended Complaint”) on September 25, 2015, which continued to assert claims against the Company, as well as Ms. Wilson and Messrs. Boynton and Vanden Noort. Defendants timely filed Motions to Dismiss the Amended Complaint on October 26, 2015, which are pending. At this preliminary stage, the Company cannot determine whether there is a reasonable likelihood a material loss has been incurred nor can the range of any such loss be estimated.

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

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

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


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

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

$16,549

 

$15,000

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
906

 

Total financial commitments
 

$19,709

 

$15,043

 
 
 
 
 
(a)
Approximately $15 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation. These letters of credit will expire at various dates during 2016 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At March 31, 2016, the Company has a de minimis liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(c)
Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates during 2016 and 2017 and are expected to be renewed as required.
 
10.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
Three Months Ended March 31,
 
2016
 
2015
Net Income

$15,058

 

$18,180

Less: Net income attributable to noncontrolling interest
586

 
433

Net income attributable to Rayonier Inc.

$14,472

 

$17,747

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

 
126,614,334

Dilutive effect of:
 
 
 
Stock options
53,526

 
168,680

Performance and restricted shares
35,124

 
51,494

Assumed conversion of Senior Exchangeable Notes (a)

 
892,885

Assumed conversion of warrants (a)

 

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

 
127,727,393

 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:

$0.12

 

$0.14

 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:

$0.12

 

$0.14



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

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

 
757,960

Assumed conversion of exchangeable note hedges (a)

 
892,885

Total
1,095,453

 
1,650,845

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

11.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks.
Accounting for derivative financial instruments is governed by Accounting Standards Codification Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented.
Foreign Currency Exchange and Option Contracts
The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2016, foreign currency exchange contracts and foreign currency option contracts had maturity dates through June 2017 and July 2017, respectively.
Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

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

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

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

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

$711

 

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

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

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

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

 

Foreign currency option contracts
Other operating income, net
 
258

 

Interest rate swaps
Interest income and miscellaneous (expense), net
 
(1,219
)
 
(1,855
)
During the next 12 months, the amount of the March 31, 2016 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $0.8 million.
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Notional Amount
 
March 31, 2016
 
December 31, 2015
Derivatives designated as cash flow hedges:
 
 
 
Foreign currency exchange contracts

$23,950

 

$21,250

Foreign currency option contracts
88,700

 
107,200

Interest rate swaps
350,000

 
350,000

 
 
 
 
Derivatives designated as net investment hedges:
 
 
 
Foreign currency option contracts

 
331,588

 
 
 
 
Derivative not designated as a hedging instrument:
 
 
 
Interest rate swaps

 
130,169


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

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

$221

 

$43

 
Other assets
 
131

 

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

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

 
560

 
Other assets
 
323

 
408

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

 
4,630

 
Other current liabilities
 

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

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

$932

 

$5,233

Other assets
 
 
454

 
408

Total derivative assets
 
 

$1,386

 

$5,641

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

($27,200
)
 

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

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


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

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

$76,204

 

$76,204

 

 

$51,777

 

$51,777

 

Restricted cash (b)
12,912

 
12,912

 

 
23,525

 
23,525

 

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

 
(12,211
)
 

 

 

Long-term debt (c)
(857,429
)
 

 
(875,329
)
 
(830,554
)
 

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

 
(25,082
)
 
(18,244
)
 

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

 
(923
)
 
(1,625
)
 

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

 

 
191

 
3,964

 

 
3,964

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


18


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

13.
EMPLOYEE BENEFIT PLANS
The Company has one qualified non-contributory defined benefit pension plan covering a portion of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plan. Currently, the pension plans are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change. In 2016, the Company has no mandatory pension contribution requirement.
The net pension and postretirement benefit costs that have been recorded are shown in the following table:
 
Pension
 
Postretirement
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost

$327

 

$371

 

$2

 

$3

Interest cost
869

 
830

 
12

 
13

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

 

Amortization of prior service cost

 
3

 

 

Amortization of losses (gains)
629

 
933

 
(12
)
 
3

Net periodic benefit cost

$817

 

$1,130

 

$2

 

$19

 
 
 
 
 
 
 
 

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

$4,559

 

$4,109

Other non-timber income
519

 
1,364

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

 

Miscellaneous income, net
490

 
342

Total

$5,904

 

$5,574

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


19


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

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

$11,678

 

$12,252

Log inventory
5,765

 
3,099

Total inventory

$17,443

 

$15,351

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

16.
RESTRICTED DEPOSITS
In order to qualify for like-kind exchange (“LKE”) treatment, the proceeds from real estate sales must be deposited with a third-party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of March 31, 2016 and December 31, 2015, the Company had $12.9 million and $23.5 million, respectively, of proceeds from real estate sales classified as restricted cash in “Other Assets,” which were deposited with an LKE intermediary.

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

$25,533

 
(145
)
 

($1,548
)
 

($28,665
)
 

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

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

 

 
4,400

 
3,287

(b)
7,687

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

 
(10,044
)
 
2,933

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

($2,450
)
 

$6,271

 

($11,592
)
 

($25,732
)
 

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

 

 
(14,336
)
(c)

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

 
(4,606
)
 
413

 
617


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

 
(4,606
)
 
(13,923
)

617


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

 

 
(184
)
 

 
3,438

Balance as of March 31, 2016

$5,568

 

$1,665

 

($25,699
)
 

($25,115
)
 

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

20


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

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

$334

 

$364

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

 
293

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

$413

 

$292

 
 



21


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

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

 

 

$134,843

 

 

$134,843

Costs and Expenses
 
 
 
 
 
 
 
 
 
Cost of sales

 

 
107,971

 

 
107,971

Selling and general expenses

 
2,938

 
6,841

 

 
9,779

Other operating (income) expense, net

 
(1,155
)
 
(4,749
)
 

 
(5,904
)
 

 
1,783

 
110,063

 

 
111,846

OPERATING (LOSS) INCOME

 
(1,783
)
 
24,780

 

 
22,997

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

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

 
681

 
(4,341
)
 

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

 
18,997

 

 
(34,570
)
 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
14,472

 
15,751

 
18,624

 
(34,570
)
 
14,277

Income tax (expense) benefit

 
(178
)
 
959

 

 
781

NET INCOME
14,472

 
15,573

 
19,583

 
(34,570
)
 
15,058

Less: Net income attributable to noncontrolling interest

 

 
586

 

 
586

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
14,472

 
15,573

 
18,997

 
(34,570
)
 
14,472

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 


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

 
(4,606
)
 
7,410

 
(7,288
)
 
2,804

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

 
13,923

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

 
617

 

 
(617
)
 
617

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

 
6,018

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

 
(3,302
)
 
28,105

 
(28,552
)
 
4,705

Less: Comprehensive loss attributable to noncontrolling interest

 

 
(3,749
)
 

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

$8,454

 

($3,302
)
 

$31,854

 

($28,552
)
 

$8,454

 
 
 
 
 
 
 
 
 
 

22


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

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

 

 

$140,305

 

 

$140,305

Costs and Expenses
 
 
 
 
 
 

 
 
Cost of sales

 

 
107,234

 

 
107,234

Selling and general expenses

 
4,949

 
5,949

 

 
10,898

Other operating income, net

 

 
(5,574
)
 

 
(5,574
)
 

 
4,949

 
107,609

 

 
112,558

OPERATING (LOSS) INCOME

 
(4,949
)
 
32,696

 

 
27,747

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

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

 
693

 
(4,123
)
 

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

 
24,799

 

 
(43,778
)
 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
17,747

 
18,019

 
25,721

 
(43,778
)
 
17,709

Income tax benefit (expense)

 
960

 
(489
)
 

 
471

NET INCOME
17,747

 
18,979

 
25,232

 
(43,778
)
 
18,180

Less: Net income attributable to noncontrolling interest

 

 
433

 

 
433

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
17,747

 
18,979

 
24,799

 
(43,778
)
 
17,747

OTHER COMPREHENSIVE LOSS (INCOME)
 
 
 
 
 
 


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

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

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

 
781

 
20

 
(801
)
 
781

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

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

 
8,715

 
9,983

 
(22,489
)
 
3,692

Less: Comprehensive loss attributable to noncontrolling interest

 

 
(3,791
)
 

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

$7,483

 

$8,715

 

$13,774

 

($22,489
)
 

$7,483

 
 
 
 
 
 
 
 
 
 







23


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

 
CONDENSED CONSOLIDATING BALANCE SHEETS
 
As of March 31, 2016
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$8,773

 

$27,868

 

$39,563

 

 

$76,204

Accounts receivable, less allowance for doubtful accounts

 
318

 
27,179

 

 
27,497

Inventory

 

 
17,443

 

 
17,443

Prepaid expenses

 
463

 
12,427

 

 
12,890

Other current assets

 
245

 
932

 

 
1,177

Total current assets
8,773

 
28,894

 
97,544

 

 
135,211

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

 

 
2,063,691

 

 
2,063,691

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT INVESTMENTS

 

 
66,618

 

 
66,618

NET PROPERTY, PLANT AND EQUIPMENT

 
339

 
6,496

 

 
6,835

INVESTMENT IN SUBSIDIARIES
1,286,575

 
2,365,615

 

 
(3,652,190
)
 

INTERCOMPANY RECEIVABLE
34,272

 
(606,172
)
 
571,900

 

 

OTHER ASSETS
3

 
19,007

 
40,772

 

 
59,782

TOTAL ASSETS

$1,329,623

 

$1,807,683

 

$2,847,021

 

($3,652,190
)
 

$2,332,137

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 

 
 
CURRENT LIABILITIES
 
 
 
 
 
 

 
 
Accounts payable
11

 

$1,164

 

$21,067

 

 

$22,242

Current maturities of long-term debt

 

 
12,211

 

 
12,211

Accrued taxes

 
54

 
4,022

 

 
4,076

Accrued payroll and benefits

 
1,575

 
1,742

 

 
3,317

Accrued interest
6,094

 
973

 
306

 

 
7,373

Other current liabilities

 
439

 
18,650

 

 
19,089

Total current liabilities
6,105

 
4,205

 
57,998

 

 
68,308

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
322,789

 
469,008

 
65,632

 

 
857,429

PENSION AND OTHER POSTRETIREMENT BENEFITS

 
34,997

 
(684
)
 

 
34,313

OTHER NON-CURRENT LIABILITIES

 
31,859

 
4,448

 

 
36,307

INTERCOMPANY PAYABLE
(255,715
)
 
(18,961
)
 
274,676

 

 

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,256,444

 
1,286,575

 
2,365,615

 
(3,652,190
)
 
1,256,444

Noncontrolling interest

 

 
79,336

 

 
79,336

TOTAL SHAREHOLDERS’ EQUITY
1,256,444

 
1,286,575

 
2,444,951

 
(3,652,190
)
 
1,335,780

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$1,329,623

 

$1,807,683

 

$2,847,021

 

($3,652,190
)
 

$2,332,137



24


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

 
CONDENSED CONSOLIDATING BALANCE SHEETS
 
As of December 31, 2015
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$2,472

 

$13,217

 

$36,088

 

 

$51,777

Accounts receivable, less allowance for doubtful accounts

 
1,870

 
18,352

 

 
20,222

Inventory

 

 
15,351

 

 
15,351

Prepaid expenses

 
443

 
12,211

 

 
12,654

Other current assets

 
4,876

 
805

 

 
5,681

Total current assets
2,472

 
20,406

 
82,807

 

 
105,685

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION

 

 
2,066,780

 

 
2,066,780

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT INVESTMENTS

 

 
65,450

 

 
65,450

NET PROPERTY, PLANT AND EQUIPMENT

 
330

 
6,412

 

 
6,742

INVESTMENT IN SUBSIDIARIES
1,321,681

 
2,212,405

 

 
(3,534,086
)
 

INTERCOMPANY RECEIVABLE
34,567

 
(610,450
)
 
575,883

 

 

OTHER ASSETS
3

 
18,718

 
52,560

 

 
71,281

TOTAL ASSETS

$1,358,723

 

$1,641,409

 

$2,849,892

 

($3,534,086
)
 

$2,315,938

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
Accounts payable
609

 

$1,463

 

$19,407

 

 

$21,479

Current maturities of long-term debt

 

 

 

 

Accrued taxes

 
(10
)
 
3,695

 

 
3,685

Accrued payroll and benefits

 
3,594

 
3,443

 

 
7,037

Accrued interest
3,047

 
666

 
2,440

 

 
6,153

Other current liabilities

 
262

 
20,841

 

 
21,103

Total current liabilities
3,656

 
5,975

 
49,826

 

 
59,457

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
322,697

 
280,978

 
226,879

 

 
830,554

PENSION AND OTHER POSTRETIREMENT BENEFITS

 
34,822

 
(685
)
 

 
34,137

OTHER NON-CURRENT LIABILITIES

 
16,914

 
13,136

 

 
30,050

INTERCOMPANY PAYABLE
(255,714
)
 
(18,961
)
 
274,675

 

 

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,288,084

 
1,321,681

 
2,212,405

 
(3,534,086
)
 
1,288,084

Noncontrolling interest

 

 
73,656

 

 
73,656

TOTAL SHAREHOLDERS’ EQUITY
1,288,084

 
1,321,681

 
2,286,061

 
(3,534,086
)
 
1,361,740

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$1,358,723

 

$1,641,409

 

$2,849,892

 

($3,534,086
)
 

$2,315,938



25


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 CASH FLOWS
 
For the Three Months Ended March 31, 2016
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES

$2,332

 

($3,624
)
 

$32,327

 

 

$31,035

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures

 

 
(13,298
)
 

 
(13,298
)
Real estate development investments

 

 
(1,685
)
 

 
(1,685
)
Purchase of timberlands

 

 
(14,323
)
 

 
(14,323
)
Change in restricted cash

 

 
10,613

 

 
10,613

Investment in subsidiaries

 
1,136

 

 
(1,136
)
 

Other

 

 
(1,590
)
 

 
(1,590
)
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES

 
1,136

 
(20,283
)
 
(1,136
)
 
(20,283
)
FINANCING ACTIVITIES
 
 
 
 
 
 

 
 
Issuance of debt

 
213,000

 
72,552

 

 
285,552

Repayment of debt

 
(25,000
)
 
(215,752
)
 

 
(240,752
)
Dividends paid
(30,675
)
 

 

 

 
(30,675
)
Proceeds from the issuance of common shares
18

 

 

 

 
18

Repurchase of common shares
(690
)
 

 

 

 
(690
)
Intercompany distributions
35,332

 
(170,861
)
 
134,393

 
1,136

 

Other
(16
)
 

 

 

 
(16
)
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
3,969

 
17,139

 
(8,807
)
 
1,136

 
13,437

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

 
238

 

 
238

CASH AND CASH EQUIVALENTS
 
 
 
 
 
 

 
 
Change in cash and cash equivalents
6,301

 
14,651

 
3,475

 

 
24,427

Balance, beginning of year
2,472

 
13,217

 
36,088

 

 
51,777

Balance, end of period

$8,773

 

$27,868

 

$39,563

 

 

$76,204


26


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 CASH FLOWS
 
For the Three Months Ended March 31, 2015
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES

$6,735

 

$13,604

 

$42,105

 

($9,046
)
 

$53,398

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures

 

 
(13,164
)
 

 
(13,164
)
Real estate development investments

 

 
(276
)
 

 
(276
)
Purchase of timberlands

 

 
(23,070
)
 

 
(23,070
)
Change in restricted cash

 

 
(7,071
)
 

 
(7,071
)
Investment in subsidiaries

 
(8,807
)
 

 
8,807

 

Other

 

 
(158
)
 

 
(158
)
CASH USED FOR INVESTING ACTIVITIES

 
(8,807
)
 
(43,739
)
 
8,807

 
(43,739
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Issuance of debt

 
12,000

 

 

 
12,000

Repayment of debt

 
(10,000
)
 
(1,371
)
 

 
(11,371
)
Dividends paid
(31,667
)
 

 

 

 
(31,667
)
Proceeds from the issuance of common shares
546

 

 

 

 
546

Intercompany distributions

 
(9,333
)
 
9,094

 
239

 

Other
(94
)
 

 

 

 
(94
)
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(31,215
)
 
(7,333
)
 
7,723

 
239

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

 

 
(1,582
)
 

 
(1,582
)
CASH AND CASH EQUIVALENTS
 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
(24,480
)
 
(2,536
)
 
4,507

 

 
(22,509
)
Balance, beginning of year
102,218

 
8,105

 
51,235

 

 
161,558

Balance, end of period

$77,738

 

$5,569

 

$55,742

 

 

$139,049



27


Table of Contents



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “we,” “us,” “our,” “the Company,” or “Rayonier,” we mean Rayonier Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.
This MD&A is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors which may affect future results. Our MD&A should be read in conjunction with our Consolidated Financial Statements included in Item 1 of this report, our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) and information contained in our subsequent reports filed with the Securities and Exchange Commission (the “SEC”).
Forward-Looking Statements
Certain statements in this document regarding anticipated financial outcomes including Rayonier’s earnings guidance, if any, business and market conditions, outlook, expected dividend rate, expected harvest schedules, timberland acquisitions, sales of non-strategic timberlands, the anticipated benefits of Rayonier’s business strategy, capital allocation, expected availability and access to borrowings, and other similar statements relating to Rayonier’s future events, developments, or financial or operational performance or results, are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are identified by the use of words such as “may,” “will,” “should,” “expect,” “estimate,” “believe,” “intend,” “project,” “anticipate” and other similar language. However, the absence of these or similar words or expressions does not mean that a statement is not forward-looking. While management believes that these forward-looking statements are reasonable when made, forward-looking statements are not guarantees of future performance or events and undue reliance should not be placed on these statements. The risk factors contained in Item 1A — Risk Factors in the 2015 Form 10-K and similar discussions included in other reports that we subsequently file with the SEC, among others, could cause actual results or events to differ materially from the Company’s historical experience and those expressed in forward-looking statements made in this document.
Forward-looking statements are only as of the date they are made, and the Company undertakes no duty to update its forward-looking statements except as required by law. You are advised, however, to review any subsequent disclosures the Company makes on related subjects in its subsequent reports filed with the SEC.

Our Company
We are a leading timberland real estate investment trust (“REIT”) with assets located in some of the most productive timber growing regions in the U.S. and New Zealand. Our revenues, operating income and cash flows are primarily derived from the following core business segments: Southern Timber, Pacific Northwest Timber, New Zealand Timber, Real Estate and Trading. As of March 31, 2016, we owned or leased under long-term agreements approximately 2.3 million acres of timberlands located in the U.S. South (1.9 million acres) and U.S. Pacific Northwest (373,000 acres). We also have a 77% ownership interest in Matariki Forestry Group, a joint venture (“New Zealand JV”), that owns or leases approximately 435,000 acres (299,000 net plantable acres) of timberlands in New Zealand.
The Southern Timber, Pacific Northwest Timber and New Zealand Timber segments include all activities related to the harvesting of timber and other non-timber income activities, such as the leasing of properties for hunting, mineral extraction and cell towers. The New Zealand Timber segment also reflects any land or leasehold sales that occur within our New Zealand portfolio.
The Real Estate segment includes all U.S. land sales disaggregated into five sales categories: Improved Development, Unimproved Development, Rural, Non-Strategic / Timberlands and Large Dispositions.
The Trading segment reflects the log trading activities that support our New Zealand operations.


28


Table of Contents

Industry and Market Conditions
The demand for timber is directly related to the underlying demand for pulp, paper, lumber and other wood products. The significant majority of timber sold in our Southern Timber segment is consumed domestically. With a higher proportion of pulpwood, our Southern Timber segment relies heavily on downstream markets for pulp and paper, and to a lesser extent wood pellet markets. Our Pacific Northwest segment relies primarily on domestic customers but also exports a significant volume of timber, particularly to China. Both the Southern and Pacific Northwest Timber segments rely on the strength of U.S. lumber markets as well as underlying housing starts. Our New Zealand Timber segment sells timber to domestic New Zealand wood products mills and also exports a significant portion of its volume to markets in China, Korea and India. In addition to market dynamics in the Pacific Rim, the New Zealand Timber segment is subject to foreign exchange fluctuations, which can impact the competitiveness of its products.
In our Southern Timber segment, first quarter 2016 average pine pulpwood prices increased 4% versus 2015 average prices primarily due to improved markets, specifically along the east coast and in Alabama, while sawtimber prices decreased 3% due to a higher mix of chip-n-saw versus sawtimber and decreased harvesting of sawtimber for the plywood market in the Southwest. In the Pacific Northwest, average delivered sawtimber prices decreased 6% versus 2015 average prices primarily due to continued weak export demand while average delivered pulpwood prices were comparable to the prior year. In New Zealand, first quarter 2016 average export sawtimber pricing increased 6% versus 2015 average prices primarily due to stronger demand for radiata pine. Domestic sawtimber pricing increased 4% due to stronger demand, while domestic pulpwood pricing decreased 8% on a US$ basis due to a fall in the NZ$/ US$ exchange rate over the same comparable periods.
The Company is also subject to risk in price fluctuations in its major cost components. The primary components of the Company's cost of sales are the cost basis of timber sold (depletion), the cost basis of real estate sold and logging and transportation costs (cut and haul). Depletion includes the amortization of capitalized costs (site preparation, planting and fertilization, real estate taxes, lease payments, road and bridge construction, software and certain payroll costs). Other costs include depreciation of fixed assets and equipment, road maintenance, severance and excise taxes, fire prevention and real estate commissions and closing costs.

For additional information on market conditions impacting our business, see Results of Operations.

Critical Accounting Policies and Use of Estimates
The preparation of financial statements requires us to make estimates, assumptions and judgments that affect our assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information we believe are reasonable. Actual results may differ from these estimates. For a full description of our critical accounting policies, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2015 Form 10-K.


29


Table of Contents

Discussion of Timber Inventory and Sustainable Yield
See Item 1 — BusinessDiscussion of Timber Inventory and Sustainable Yield in the 2015 Form 10-K.

Our Timberlands
Our timber operations are disaggregated into three geographically distinct segments: Southern Timber, Pacific Northwest Timber and New Zealand Timber. The following table provides a breakdown of our timberland holdings as of March 31, 2016 and December 31, 2015:
(acres in 000s)
As of March 31, 2016
 
As of December 31, 2015
 
Owned
 
Leased
 
Total
 
Owned
 
Leased
 
Total
Southern
 
 
 
 
 
 
 
 
 
 
 
Alabama
301

 
24

 
325

 
302

 
24

 
326

Arkansas

 
15

 
15

 

 
15

 
15

Florida
282

 
92

 
374

 
275

 
93

 
368

Georgia
566

 
109

 
675

 
571

 
109

 
680

Louisiana
149

 
1

 
150

 
149

 
1

 
150

Mississippi
90

 

 
90

 
91

 

 
91

Oklahoma
92

 

 
92

 
92

 

 
92

Tennessee
1

 

 
1

 
1

 

 
1

Texas
152

 

 
152

 
153

 

 
153

 
1,633


241


1,874

 
1,634

 
242

 
1,876

 
 
 
 
 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
 
 
 
 
Oregon
6

 

 
6

 
6

 

 
6

Washington
366

 
1

 
367

 
366

 
1

 
367

 
372

 
1

 
373

 
372

 
1

 
373

 
 
 
 
 
 
 
 
 
 
 
 
New Zealand (a)
179

 
256

 
435

 
185

 
254

 
439

Total
2,184

 
498

 
2,682

 
2,191

 
497

 
2,688

 
 
 
 
 
(a)
Represents legal acres owned and leased by the New Zealand JV, in which Rayonier owns a 77% interest. As of March 31, 2016, legal acres in New Zealand were comprised of 299,000 plantable acres and 136,000 non-productive acres.

30


Table of Contents

The following tables detail activity for owned and leased acres in our timberland holdings by state from December 31, 2015 to March 31, 2016:
(acres in 000s)
Acres Owned
 
December 31, 2015
 
Acquisitions
 
Sales
 
March 31, 2016
Southern
 
 
 
 
 
 
 
Alabama
302

 

 
(1
)
 
301

Florida
275

 
7

 

 
282

Georgia
571

 

 
(5
)
 
566

Louisiana
149

 

 

 
149

Mississippi
91

 

 
(1
)
 
90

Oklahoma
92

 

 

 
92

Tennessee
1

 

 

 
1

Texas
153

 

 
(1
)
 
152

 
1,634

 
7

 
(8
)
 
1,633

 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
Oregon
6

 

 

 
6

Washington
366

 

 

 
366

 
372

 

 

 
372

 
 
 
 
 
 
 
 
New Zealand (a)
185

 

 
(6
)
 
179

Total
2,191

 
7

 
(14
)
 
2,184

 
 
 
 
 
(a)
Represents legal acres owned by the New Zealand JV, in which Rayonier has a 77% interest.
(acres in 000s)
Acres Leased
 
December 31, 2015
 
New Leases
 
Expired Leases (a)
 
March 31, 2016
Southern
 
 
 
 
 
 
 
Alabama
24

 

 

 
24

Arkansas
15

 

 

 
15

Florida
93

 

 
(1
)
 
92

Georgia
109

 

 

 
109

Louisiana
1

 

 

 
1

 
242

 

 
(1
)
 
241

 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
Washington
1

 

 

 
1

 
 
 
 
 
 
 
 
New Zealand (b)
254

 
2

 

 
256

Total
497

 
2

 
(1
)
 
498

 
 
 
 
 
(a)
Includes acres previously under lease that have been harvested or sold.
(b)
Represents legal acres leased by the New Zealand JV, in which Rayonier has a 77% interest.



31


Table of Contents

Results of Operations
Consolidated Results
The following table provides key financial information by segment and on a consolidated basis:
 
Three Months Ended
March 31,
Financial Information (in millions)
2016
 
2015
Sales
 
 
 
Southern Timber

$44.7

 

$35.5

Pacific Northwest Timber
19.3

 
19.2

New Zealand Timber
36.0

 
41.2

Real Estate
 
 
 
Improved Development
1.7

 

Unimproved Development
0.9

 
4.8

Rural
3.7

 
6.8

Non-Strategic / Timberlands
7.1

 
12.2

Large Dispositions

 

Total Real Estate
13.4

 
23.8

Trading
21.4

 
20.6

Total Sales

$134.8

 

$140.3

 
 
 
 
Operating Income
 
 
 
Southern Timber

$15.8

 

$12.4

Pacific Northwest Timber
1.4

 
2.6

New Zealand Timber
4.7

 
5.7

Real Estate
4.2

 
12.6

Trading
0.4

 
0.3

Corporate and other
(3.5
)

(5.9
)
Operating Income
23.0

 
27.7

Interest Expense, Interest Income and Other
(8.7
)

(10.0
)
Income Tax Benefit
0.8

 
0.5

Net Income
15.1

 
18.2

Less: Net income attributable to noncontrolling interest
0.6

 
0.5

Net Income Attributable to Rayonier Inc.

$14.5

 

$17.7

 
 
 
 
Adjusted EBITDA (a)
 
 
 
Southern Timber

$32.4

 

$26.7

Pacific Northwest Timber
6.0

 
6.4

New Zealand Timber
11.4

 
13.7

Real Estate
9.7

 
20.1

Trading
0.4

 
0.3

Corporate and Other
(4.3
)
 
(5.7
)
Total Adjusted EBITDA

$55.6

 

$61.5

 
 
 
 
 
(a)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.



32


Table of Contents

 
Three Months Ended
March 31,
Southern Timber Overview
2016
 
2015
Sales Volume (in thousands of tons)
 
 
 
Pine Pulpwood
1,181

 
905

Pine Sawtimber
528

 
418

Total Pine Volume
1,709

 
1,323

Hardwood
50

 
47

Total Volume
1,759

 
1,370

 
 
 
 
Percentage Delivered Sales
24
%
 
25
%
Percentage Stumpage Sales
76
%
 
75
%
 
 
 
 
Net Stumpage Pricing (dollars per ton)
 
 
 
Pine Pulpwood

$18.90

 

$18.83

Pine Sawtimber
26.90

 
28.84

Weighted Average Pine

$21.38

 

$21.99

Hardwood
12.47

 
13.07

Weighted Average Total

$21.11

 

$21.69

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$44.7

 

$35.5

Less: Cut and Haul
(7.6
)
 
(5.8
)
Net Stumpage Sales

$37.1

 

$29.7

 
 
 
 
Operating Income

$15.8

 

$12.4

(+) Depreciation, depletion and amortization
16.6

 

$14.3

Adjusted EBITDA (a)

$32.4

 

$26.7

 
 
 
 
Other Data
 
 
 
Non-Timber Income (in millions of dollars) (b)

$4.2

 

$4.2

Period-End Acres (in thousands)
1,874

 
1,901

 
 
 
 
 
(a)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.
(b)
Non-Timber Income is presented net of direct charges and excludes allocated overhead.










33


Table of Contents

 
Three Months Ended
March 31,
Pacific Northwest Timber Overview
2016
 
2015
Sales Volume (in thousands of tons)
 
 
 
Pulpwood
90

 
55

Sawtimber
241

 
270

Total Volume
331

 
325

 
 
 
 
Sales Volume (converted to MBF)
 
 
 
Pulpwood
8,600

 
5,140

Sawtimber
30,378

 
33,455

Total Volume
38,978

 
38,595

 
 
 
 
Percentage Delivered Sales
87
%
 
79
%
Percentage Sawtimber Sales
73
%
 
83
%
 
 
 
 
Delivered Log Pricing (in dollars per ton)
 
 
 
Pulpwood

$44.84

 

$43.19

Sawtimber
67.95

 
72.03

Weighted Average Log Price

$61.22

 

$66.91

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$19.3

 

$19.2

Less: Cut and Haul
(8.7
)
 
(8.1
)
Net Stumpage Sales

$10.6

 

$11.1

 
 
 
 
Operating Income

$1.4

 

$2.6

(+) Depreciation, depletion and amortization
4.6

 
3.8

Adjusted EBITDA (a)

$6.0

 

$6.4

 
 
 
 
Other Data
 
 
 
Non-Timber Income (in millions of dollars) (b)

$0.8

 

$0.9

Period-End Acres (in thousands)
373

 
368

Sawtimber (in dollars per MBF)

$548

 

$604

Estimated Percentage of Export Volume
26
%
 
19
%
 
 
 
 
 
(a)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.
(b)
Non-Timber Income is presented net of direct charges and excludes allocated overhead.


34


Table of Contents

 
Three Months Ended
March 31,
New Zealand Timber Overview
2016
 
2015
Sales Volume (in thousands of tons)
 
 
 
Domestic Sawtimber (Delivered)
186

 
150

Domestic Pulpwood (Delivered)
94

 
100

Export Sawtimber (Delivered)
186

 
201

Export Pulpwood (Delivered)
19

 
11

Stumpage

 
76

Total Volume
485

 
538

 
 
 
 
Percentage Delivered Sales
100
%
 
86
%
Percentage Stumpage Sales

 
14
%
 
 
 
 
Delivered Log Pricing (in dollars per ton)
 
 
 
Domestic Sawtimber

$66.64

 

$70.77

Domestic Pulpwood

$29.49

 

$35.38

Export Sawtimber

$94.34

 

$102.60

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$34.2

 

$37.8

Less: Cut and Haul
(14.6
)
 
(16.0
)
Less: Port and Freight Costs
(5.3
)
 
(6.6
)
Net Stumpage Sales

$14.3

 

$15.2

 
 
 
 
Land Sales
1.8

 
3.4

Total Sales

$36.0

 

$41.2

 
 
 
 
Operating Income

$4.7

 

$5.7

(+) Depreciation, depletion and amortization
4.9

 
8.0

(+) Non-cash cost of land sold
1.8

 

Adjusted EBITDA (a)

$11.4

 

$13.7

 
 
 
 
Other Data
 
 
 
New Zealand Dollar to U.S. Dollar Exchange Rate (b)
0.6646

 
0.7556

Net Plantable Period-End Acres (in thousands)
299

 
303

Domestic Sawtimber (in $NZD per tonne)

$110.31

 

$102.43

Export Sawtimber (in dollars per JAS m3)

$109.65

 

$119.04

 
 
 
 
 
(a)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.
(b)
Represents the average period rate.


35


Table of Contents

 
Three Months Ended
March 31,
Real Estate Overview
2016
 
2015
Sales (in millions of dollars)
 
 
 
Improved Development (a)

$1.7



Unimproved Development
0.9


4.8

Rural
3.7


6.8

Non-Strategic / Timberlands
7.1


12.2

Large Dispositions

 

Total Sales

$13.4

 

$23.8

 
 
 
 
Acres Sold
 
 
 
Improved Development (a)
47

 

Unimproved Development
48

 
409

Rural
1,444

 
2,877

Non-Strategic / Timberlands
6,130

 
4,111

Total Acres Sold
7,669

 
7,397

 
 
 
 
Price per Acre (dollars per acre)
 
 
 
Improved Development (a)

$37,353

 

Unimproved Development
18,000

 
11,781

Rural
2,548

 
2,368

Non-Strategic / Timberlands
1,155

 
2,957

Weighted Average (Total)

$1,743

 

$3,216

Weighted Average (Adjusted) (b)

$1,525

 

$3,216

 
 
 
 
Sales (Excluding Large Dispositions)
13.4


23.8

 
 
 
 
Adjusted EBITDA (c)
9.7

 
20.1

() Depreciation, depletion and amortization
(3.2
)
 
(3.8
)
() Non-cash cost of land sold
(2.3
)
 
(3.7
)
Operating Income

$4.2

 

$12.6

 
 
 
 
 
(a)
Reflects land with capital invested in infrastructure improvements.
(b)
Excludes Improved Development and Large Dispositions.
(c)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.







36


Table of Contents

 
Three Months Ended
March 31,
Capital Expenditures By Segment (in millions of dollars)
2016
 
2015
Timber Capital Expenditures
 
 
 
Southern Timber
 
 
 
Reforestation, silviculture and other capital expenditures

$3.1

 

$2.1

Property taxes
1.9

 
1.8

Lease payments
2.0

 
2.2

Allocated overhead
1.0

 
0.9

Subtotal Southern Timber

$8.0

 

$7.0

Pacific Northwest Timber
 
 
 
Reforestation, silviculture and other capital expenditures
2.3

 
2.7

Property taxes
0.1

 
0.1

Lease payments

 

Allocated overhead
0.4

 
0.5

Subtotal Pacific Northwest Timber

$2.8

 

$3.3

New Zealand Timber
 
 
 
Reforestation, silviculture and other capital expenditures
1.3

 
1.5

Property taxes
0.1

 
0.1

Lease payments
0.4

 
0.4

Allocated overhead
0.6

 
0.7

Subtotal New Zealand Timber

$2.4

 

$2.7

Total Timber Segments Capital Expenditures

$13.2

 

$13.0

Real Estate
0.1

 
0.2

Corporate

 

Total Capital Expenditures

$13.3

 

$13.2

 
 
 
 
Timberland Acquisitions
 
 
 
Southern Timber

$14.3

 

$23.1

Pacific Northwest Timber

 

New Zealand Timber

 

Subtotal Timberland Acquisitions

$14.3

 

$23.1

 
 
 
 
Real Estate Development Investments

$1.7

 

$0.3



37


Table of Contents



The following tables summarize sales, operating income and Adjusted EBITDA variances for March 31, 2016 versus March 31, 2015 (millions of dollars):
Sales
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Total
March 31, 2015
 

$35.5

 

$19.2

 

$41.2

 

$23.8

 

$20.6

 

$140.3

Volume/Mix
 
10.0

 
1.3

 
(0.7
)
 
0.9

 
1.3

 
12.8

Price
 
(0.8
)
 
(1.2
)
 
(1.0
)
 
(11.3
)
 
0.2

 
(14.1
)
Foreign exchange (a)
 

 

 
(2.3
)
 

 

 
(2.3
)
Other
 

 

 
(1.2
)
 

 
(0.7
)
 
(1.9
)
March 31, 2016
 

$44.7

 

$19.3

 

$36.0

 

$13.4

 

$21.4

 

$134.8


Operating Income
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate and Other
 
Total
March 31, 2015
 

$12.4

 

$2.6

 

$5.7

 

$12.6

 

$0.3

 

($5.9
)
 

$27.7

Volume/Mix
 
4.4

 
0.2

 
(0.3
)
 
0.6

 

 

 
4.9

Price
 
(1.1
)
 
(0.8
)
 
(0.1
)
 
(11.3
)
 

 

 
(13.3
)
Cost
 
(1.6
)
 
0.3

 

 

 
0.1

 
2.4

 
1.2

Non-timber income
 

 
(0.1
)
 
(1.3
)
 

 

 

 
(1.4
)
Foreign exchange (a)
 

 

 
0.8

 

 

 

 
0.8

Depreciation, depletion & amortization
 
1.7

 
(0.8
)
 

 
0.7

 

 

 
1.6

Non-cash cost of land and improved development
 

 

 
(1.8
)
 
1.6

 

 

 
(0.2
)
Other
 

 

 
1.7

 

 

 

 
1.7

March 31, 2016
 

$15.8

 

$1.4

 

$4.7

 

$4.2

 

$0.4

 

($3.5
)
 

$23.0


Adjusted EBITDA (b)
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate and Other
 
Total
March 31, 2015
 

$26.7

 

$6.4

 

$13.7

 

$20.1

 

$0.3

 

($5.7
)
 

$61.5

Volume/Mix
 
8.4

 
0.2

 
(0.8
)
 
0.9

 

 

 
8.7

Price
 
(1.1
)
 
(0.8
)
 
(0.1
)
 
(11.3
)
 

 

 
(13.3
)
Cost
 
(1.6
)
 
0.3

 

 

 
0.1

 
1.4

 
0.2

Non-timber income
 

 
(0.1
)
 
(1.3
)
 

 

 

 
(1.4
)
Foreign exchange (a)
 

 

 
(0.1
)
 

 

 

 
(0.1
)
Other
 

 

 

 

 

 

 

March 31, 2016
 

$32.4

 

$6.0

 

$11.4

 

$9.7

 

$0.4

 

($4.3
)
 

$55.6

 
 
 
 
 
(a)
Net of currency hedging impact.
(b)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.

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Southern Timber
First quarter sales of $44.7 million increased $9.2 million, or 26%, versus the prior year period due to higher harvest volumes, partially offset by a decrease in average sawtimber prices. Harvest volumes increased 28% to 1.8 million tons versus 1.4 million tons in the prior year period. This significant increase in harvest volumes was driven by the acceleration of stumpage sale activity due to extreme wet weather conditions in certain markets. Average sawtimber stumpage prices decreased 7% to $26.90 per ton versus $28.84 per ton in the prior year period, while average pulpwood stumpage prices were roughly flat at $18.90 per ton versus $18.83 per ton in the prior year period. The decrease in average sawtimber prices was driven by mix, specifically a significant reduction in volume from one of the Company’s higher-priced sawtimber regions. Average pulpwood prices continued to be well above south-wide benchmarks due to strong pricing in our core markets, particularly along the east coast. Overall, weighted average stumpage prices (including hardwood) decreased 3% to $21.11 per ton versus $21.69 per ton in the prior year period. Operating income of $15.8 million increased $3.4 million versus the prior year period due to higher volumes ($4.4 million) and lower depletion rates ($1.7 million), which were partially offset by higher leased land reforestation expenses ($1.6 million) and lower pricing ($1.1 million). First quarter Adjusted EBITDA of $32.4 million was $5.7 million above the prior year period.

Pacific Northwest Timber
First quarter sales of $19.3 million increased $0.1 million, or 1%, versus the prior year period due to an increased proportion of delivered sales (87% versus 79% in the prior year period) and higher pulpwood prices, partially offset by lower sawtimber prices. Harvest volumes increased 2% to 331,000 tons versus 325,000 tons in the prior year period. Average delivered sawtimber prices decreased 6% to $67.95 per ton versus $72.03 per ton in the prior year period, while average delivered pulpwood prices increased 4% to $44.84 per ton versus $43.19 per ton in the prior year period. The decrease in average sawtimber prices was driven by continued weak demand in export markets and reduced local sawmill capacity, while the increase in average pulpwood prices was driven by strong local demand for pulpwood logs. Operating income of $1.4 million decreased $1.2 million versus the prior year period due to lower prices ($0.8 million), higher depletion rates ($0.8 million) and lower non-timber income ($0.1 million), which were partially offset by lower road maintenance costs ($0.3 million) and higher volumes ($0.2 million). First quarter Adjusted EBITDA of $6.0 million was $0.4 million below the prior year period.

New Zealand Timber
First quarter sales of $36.0 million decreased $5.2 million, or 13%, versus the prior year period due to lower domestic and export product prices and lower volumes. Harvest volumes declined 10% to 485,000 tons versus 538,000 tons in the prior year period. Average delivered prices for export sawtimber declined 8% to $94.34 per ton versus $102.60 per ton in the prior year period, and average delivered prices for domestic sawtimber declined 6% to $66.64 per ton versus $70.77 per ton in the prior year period. The decline in export sawtimber prices was primarily due to weaker demand from China, while the decline in domestic sawtimber prices (in U.S. dollar terms) was driven primarily by the fall in the NZ$/US$ exchange rate (US$0.66 per NZ$1.00 versus US$0.76 per NZ$1.00). Excluding the impact of foreign exchange rates, domestic sawtimber prices increased 8% from the prior year period. Operating income of $4.7 million decreased $1.0 million versus the prior year period due to lower land sales ($1.4 million), lower volumes ($0.3 million) and lower prices ($0.1 million), which were partially offset by changes in foreign exchange impacts ($0.8 million). First quarter Adjusted EBITDA of $11.4 million was $2.3 million below the prior year period.

Real Estate
First quarter sales of $13.4 million decreased $10.4 million versus the prior year period, while operating income of $4.2 million decreased $8.4 million versus the prior year period. Sales and operating income decreased in the first quarter due to lower weighted average prices ($1,743 per acre versus $3,216 per acre in the prior year period), partially offset by higher volumes (7,669 acres sold versus 7,397 acres sold in the prior year period). Improved Development first quarter sales of $1.7 million were comprised of a 47-acre sale at Belfast Commerce Park near Savannah, Georgia for approximately $37,400 per acre. Unimproved Development first quarter sales of $0.9 million were comprised of a 48-acre sale in St. John’s County, Florida for approximately $18,000 per acre. Rural first quarter sales of $3.7 million were comprised of 1,444 acres at an average price of $2,548 per acre. Non-strategic/Timberland first quarter sales of $7.1 million were comprised of 6,130 acres at an average price of $1,155 per acre, including a 5,200-acre sale of scattered, non-strategic properties with relatively low productivity (only 39% plantable). First quarter Adjusted EBITDA of $9.7 million was $10.4 million below the prior year period.

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Trading
The Trading segment complements the New Zealand Timber segment by adding scale and achieving cost savings that directly benefit the New Zealand Timber segment. Trading also generally contributes modestly to earnings without significant investment and provides market intelligence that benefits the timber business.
First quarter sales of $21.4 million increased $0.8 million versus the prior year period due to higher volumes. Sales volumes increased 7% to 228,000 tons versus 214,000 tons in the prior year period. Average prices increased 1% to $94.09 per ton versus $93.42 per ton in the prior year period. Operating income of $0.4 million was comparable to the prior year period.

Other Items
Corporate and Other Expense/Eliminations
First quarter corporate and other operating expenses of $3.5 million, decreased $2.4 million versus the prior year period primarily due to lower selling, general and administrative expenses. First quarter 2016 expenses also include $0.4 million of costs related to shareholder litigation and a $1.2 million of gain on foreign currency derivatives used in connection with the recapitalization of the New Zealand JV. Costs related to shareholder litigation include expenses incurred as a result of the securities litigation, the shareholder derivative demands and the Securities and Exchange Commission investigation. See Note 8—Contingencies.
Interest Expense
First quarter interest expense of $7.1 million decreased $1.4 million versus the prior year period, primarily due to lower rates on the term credit agreement entered into in the third quarter of 2015.
Other Non-Operating Expense
First quarter other non-operating expenses of $1.6 million were comprised of unfavorable mark-to-market adjustments on the New Zealand JV interest rate swaps, which were settled in March in connection with the recapitalization of the New Zealand JV.
Income Tax Benefit (Expense)
First quarter income tax benefit of $0.8 million was principally related to the New Zealand JV.
Share Repurchases
During the first quarter, the Company repurchased $0.7 million of common stock at an average price of $19.59 per share. As of March 31, 2016, the Company had 122.7 million shares of common stock outstanding and $99.3 million remaining on its current share repurchase authorization.
Outlook
Based on our strong start to the year and the incremental contribution we anticipate from our Pacific Northwest portfolio repositioning described in Note 1Basis of Presentation, we are raising our full-year Adjusted EBITDA guidance to $195 to $215 million. In our Southern Timber segment, despite higher-than-anticipated Q1 volumes due to accelerated removals by stumpage customers, we still expect full-year harvest volumes to be in line with our prior guidance of 5.8 to 6.0 million tons. We anticipate continued strong pulpwood demand and prices in our key market areas, and while we do not anticipate any significant price improvement in sawtimber prices this year, we still expect that the ongoing recovery in U.S. housing demand will drive price increases longer term. In our Pacific Northwest segment, we expect full-year harvest volumes will increase modestly to roughly 1.3 million tons as we ramp up production on our newly-acquired Menasha properties. Based on lower inventory levels in China relative to last year, we also anticipate some modest price improvement in the Pacific Northwest over the course of the year. We expect our New Zealand Timber segment will continue to benefit from stronger relative demand in China for its Radiata pine logs, stable domestic demand and favorable shipping costs due to low oil prices and ample shipping capacity. Also, on March 3, 2016, the Company completed the previously-announced recapitalization of our New Zealand joint venture, thereby reducing consolidated annual interest expense by approximately $5 million while increasing our ownership interest from 65% to 77%.
In our Real Estate segment, we are pleased with our progress in establishing growth catalysts for key development projects and the level of customer interest we are seeing for those properties. While demand for Rural properties remains solid, meeting our full-year Real Estate segment guidance continues to depend upon the timing of closing larger transactions in our sales pipeline.

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Liquidity and Capital Resources
Our principal source of cash is cash flow from operations, primarily the harvesting of timber and sales of real estate. As a REIT, our main use of cash is dividends. We also use cash to maintain the productivity of our timberlands through replanting and silviculture. Our operations have generally produced consistent cash flow and required limited capital resources. Short-term borrowings have helped fund working capital needs while acquisitions of timberlands generally require funding from external sources.
Summary of Liquidity and Financing Commitments
 
March 31,
 
December 31,
(millions of dollars)
2016
 
2015
Cash and cash equivalents

$76.2

 

$51.8

Total debt
869.6

 
830.6

Shareholders’ equity
1,335.8

 
1,361.7

Total capitalization (total debt plus equity)
2,205.4

 
2,192.3

Debt to capital ratio
39
%
 
38
%
Net debt to enterprise value (a)
21
%
 
22
%
 
 
 
 
 
(a)
Enterprise value is calculated as the number of shares outstanding multiplied by the Company’s share price plus net debt as of March 31, 2016 and December 31, 2015.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for the three months ended March 31.
(millions of dollars)
2016
 
2015
Cash provided by (used for):
 
 
 
Operating activities

$31.0

 

$53.4

Investing activities
(20.3
)
 
(43.7
)
Financing activities
13.4

 
(30.6
)
Cash Provided by Operating Activities
The decline in cash provided by operating activities in 2016 was primarily attributable to the $9.3 million cash settlement of the New Zealand JV interest rate swaps, a $6.8 million increase in accounts receivable and a $2.7 million increase in log inventory.
Cash Used for Investing Activities
Cash used for investing activities decreased $23.4 million compared to 2015 primarily due to the change in restricted cash of $17.6 million and lower timberland acquisitions of $8.8 million. These amounts were partially offset by a $1.4 million increase in real estate development investments.
Cash Provided by (Used for) Financing Activities
Cash provided by financing activities increased $44.0 million from the prior year period primarily due to higher net debt issuances of $44.1 million in 2016.

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Table of Contents

Expected 2016 Expenditures
As part of its mixed-use community development project located north of Jacksonville at the interchange of I-95 and State Road A1A, the Company is constructing an office building expected to cost approximately $13 million. Of the $13 million, we expect to incur $6 million in 2016 and $7 million in 2017. The new office will allow consolidation of three leased offices in Jacksonville and Fernandina Beach, Florida into one location and also serve as a catalyst for the Company’s mixed-use development project.
Capital expenditures in 2016 are expected to be approximately $63 million, excluding capital expenditures related to the office building and any strategic timberland acquisitions we may make. Capital expenditures are expected to be primarily comprised of seedling planting, fertilization and other silvicultural activities, property taxes, lease payments, allocated overhead and other capitalized costs. Aside from capital expenditures, we may also acquire timberland as we actively evaluate acquisition opportunities. Real estate development investments are expected to be between $10 million and $15 million.
Our 2016 dividend payments are expected to be approximately $123 million assuming no change in the quarterly dividend rate of $0.25 per share or material changes in the number of shares outstanding.
Future share repurchases, if any, will depend on the Company’s liquidity and cash flow, as well as general market conditions and other considerations including capital allocation priorities.
We have no mandatory pension contributions in 2016 but may make discretionary contributions in the future. On an ongoing basis, cash income tax payments are expected to be minimal. During 2016, we may repatriate $23 million of proceeds received from the sale of our forestry assets to the New Zealand JV when it was formed in 2005. If this occurs, we anticipate that cash payments for income taxes in 2016 will be approximately $2 million.
Subsequent Event
See Note 1Basis of Presentation for additional information on subsequent events.

Performance and Liquidity Indicators
The discussion below is presented to enhance the reader’s understanding of our operating performance, liquidity, ability to generate cash and satisfy rating agency and creditor requirements. This information includes two measures of financial results: Adjusted Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (“Adjusted EBITDA”), and Cash Available for Distribution (“CAD”). These measures are not defined by Generally Accepted Accounting Principles (“GAAP”) and the discussion of Adjusted EBITDA and CAD is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses Adjusted EBITDA as a performance measure and CAD as a liquidity measure. Adjusted EBITDA and CAD as defined may not be comparable to similarly titled measures reported by other companies.
We define Adjusted EBITDA as earnings before interest, taxes, depreciation, depletion, amortization, the non-cash cost of land and improved development, costs related to shareholder litigation and the gain on foreign currency derivatives. Costs related to shareholder litigation include expenses incurred as a result of the securities litigation, the shareholder derivative demands and the Securities and Exchange Commission investigation. See Note 8Contingencies.

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We reconcile Adjusted EBITDA to Net Income for the consolidated Company and to Operating Income for the Segments, as those are the nearest GAAP measures for each. Below is a reconciliation of Net Income to Adjusted EBITDA for the respective periods (in millions of dollars):
 
Three Months Ended
March 31,
 
2016
 
2015
Net Income to Adjusted EBITDA Reconciliation
 
 
 
Net income

$15.1

 

$18.2

Interest, net
8.7

 
10.0

Income tax benefit
(0.8
)
 
(0.5
)
Depreciation, depletion and amortization
29.3

 
30.0

Non-cash cost of land and improved development
4.1

 
3.7

Costs related to shareholder litigation (a)
0.4

 
0.1

Gain on foreign currency derivatives (b)

($1.2
)
 

Adjusted EBITDA

$55.6

 

$61.5

 
 
 
 
 
(a)
Costs related to shareholder litigation include expenses incurred as a result of the securities litigation, the shareholder derivative demands and the Securities and Exchange Commission investigation. See Note 8Contingencies.
(b)
Gain on foreign currency derivatives is the gain resulting from the foreign exchange derivatives used by the Company to mitigate the risk of fluctuations in foreign exchange rates while awaiting the planned capital contribution to the New Zealand JV.
The following tables reconcile Operating Income by segment to Adjusted EBITDA by segment (millions of dollars):
Three Months Ended
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate
and
other
 
Total
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)

$15.8

 

$1.4

 

$4.7

 

$4.2

 

$0.4

 

($3.5
)
 

$23.0

Depreciation, depletion and amortization
16.6

 
4.6

 
4.9

 
3.2

 

 

 
29.3

Non-cash cost of land and improved development

 

 
1.8

 
2.3

 

 

 
4.1

Costs related to shareholder litigation (a)

 

 

 

 

 
0.4

 
0.4

Gain on foreign currency derivatives (b)

 

 

 

 

 
(1.2
)
 
(1.2
)
Adjusted EBITDA

$32.4

 

$6.0

 

$11.4

 

$9.7

 

$0.4

 

($4.3
)
 

$55.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)

$12.4

 

$2.6

 

$5.7

 

$12.6

 

$0.3

 

($5.9
)
 

$27.7

Depreciation, depletion and amortization
14.3

 
3.8

 
8.0

 
3.8

 

 
0.1

 
30.0

Non-cash cost of land and improved development

 

 

 
3.7

 

 

 
3.7

Costs related to shareholder litigation (a)

 

 

 

 

 
0.1

 
0.1

Adjusted EBITDA

$26.7

 

$6.4

 

$13.7

 

$20.1

 

$0.3

 

($5.7
)
 

$61.5

 
 
 
 
 
(a)
Costs related to shareholder litigation include expenses incurred as a result of the securities litigation, the shareholder derivative demands and the Securities and Exchange Commission investigation. See Note 8Contingencies.
(b)
Gain on foreign currency derivatives is the gain resulting from the foreign exchange derivatives used by the Company to mitigate the risk of fluctuations in foreign exchange rates while awaiting the planned capital contribution to the New Zealand JV.

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Table of Contents

CAD is a non-GAAP measure of cash generated during a period that is available for dividend distribution, repurchase of the Company’s common shares, debt reduction and strategic acquisitions. We define CAD as Cash Provided by Operating Activities adjusted for capital spending (excluding strategic acquisitions) and working capital and other balance sheet changes. In compliance with SEC requirements for non-GAAP measures, we reduce CAD by mandatory debt repayments which results in the measure entitled “Adjusted CAD.”
Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):
 
Three Months Ended March 31,
 
2016
 
2015
Cash provided by operating activities

$31.0

 

$53.4

Capital expenditures (a)
(13.3
)
 
(13.2
)
Working capital and other balance sheet changes
18.7

 
3.0

CAD
36.4

 
43.2

Mandatory debt repayments

 

Adjusted CAD

$36.4

 

$43.2

Cash used for investing activities

($20.3
)
 

($43.7
)
Cash provided by (used for) financing activities

$13.4

 

($30.6
)
 
 
 
 
 
(a)
Capital expenditures exclude timberland acquisitions of $14.3 million and $23.1 million during the three months ended March 31, 2016 and March 31, 2015, respectively.
Adjusted CAD decreased as a result of a $22.4 million decrease in cash provided by operating activities, partially offset by a $15.7 million increase in working capital and other balance sheet changes. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.
Liquidity Facilities
Term Credit Agreement
On August 5, 2015, the Company entered into a credit agreement with CoBank, ACB, as administrative agent, and a syndicate of Farm Credit institutions and other commercial banks to provide $550 million of new credit facilities, including a nine-year $350 million term loan facility. The Company has entered into an interest rate swap transaction to fix the cost of the term loan facility over its nine-year term. The periodic interest rate on the term credit agreement is LIBOR plus 1.625%. The Company receives annual patronage refunds, which are profit distributions made by a cooperative to its member-users based on the quantity or value of business done with the member-user. The effective interest rate for the first quarter was approximately 3.3% after consideration of the estimated patronage refunds and interest rate swaps. As of March 31, 2016, the term debt was advanced in full under the term credit agreement.
Revolving Credit Facility
In August 2015, the Company entered into a five-year $200 million unsecured revolving credit facility, replacing the previous $200 million revolving credit facility and $100 million farm credit facility, which were scheduled to expire in April 2016 and December 2019, respectively. The periodic interest rate on the revolving credit facility is LIBOR plus 1.250%, with an unused commitment fee of 0.175%.
Net draws of $8.0 million were made during the quarter for general corporate purposes. At March 31, 2016, the Company had available borrowings of $93.3 million, net of $1.7 million to secure its outstanding letters of credit, under the revolving credit facility.

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Table of Contents

Joint Venture Debt
During the first quarter, the Company used proceeds from the term loan facility to fund a capital contribution into the New Zealand JV, which the New Zealand JV in turn used for repayment of the outstanding amount of $155 million under its existing Tranche A credit facility. In addition, all interest rate swap contracts associated with this debt were settled for $9.2 million at the time of the debt repayment.
During the three months ended March 31, 2016, the New Zealand JV made $12.2 million of additional borrowings, net of repayments, on its working capital facility. Additional draws totaling $15.4 million remain available on the working capital facility. In addition, the New Zealand JV paid $0.3 million of its shareholder loan held with the non-controlling interest party.
See Note 4Debt for additional information on these agreements and other outstanding debt, as well as for information on covenants that must be met in connection with our mortgage notes, term credit agreement and the revolving credit facility.
Subsequent Event
See Note 1Basis of Presentation for additional information on subsequent events.

Off-Balance Sheet Arrangements
See Note 9Guarantees for details on the letters of credit, surety bonds and guarantees as of March 31, 2016.

Contractual Financial Obligations
In addition to using cash flow from operations, we finance our operations through the issuance of debt and by entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction, with the result that some are recorded as liabilities on the Consolidated Balance Sheet, while others are required to be disclosed in the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis.
The following table aggregates our contractual financial obligations as of March 31, 2016 and anticipated cash spending by period: 
Contractual Financial Obligations (in millions)
Total
 
Payments Due by Period
Remaining 2016
 
2017-2018
 
2019-2020
 
Thereafter
Long-term debt (a)

$860

 

 

$42

 

$120

 

$698

Current maturities of long-term debt
12

 
12

 

 

 

Interest payments on long-term debt (b)
147

 
18

 
44

 
42

 
43

Operating leases — timberland
203

 
7

 
20

 
17

 
159

Operating leases — PP&E, offices
6

 
1

 
2

 
1

 
2

Purchase obligations — derivatives (c)
26

 
3

 
6

 
6

 
11

Purchase obligations — other
1

 

 
1

 

 

Total contractual cash obligations

$1,255

 

$41

 

$115

 

$186

 

$913

 
 
 
 
 
(a)
The book value of our long-term debt is currently recorded at $857.4 million, net of deferred financing costs, on the Company’s Consolidated Balance Sheet, but upon maturity the liability will be $860.1 million.
(b)
Projected interest payments for variable rate debt were calculated based on outstanding principal amounts and interest rates as of March 31, 2016.
(c)
Purchase obligations represent payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps). See Note 11Derivative Financial Instruments and Hedging Activities.

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Table of Contents

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market and Other Economic Risks
We are exposed to various market risks, including changes in interest rates, commodity prices and foreign exchange rates. Our objective is to minimize the economic impact of these market risks. We use derivatives in accordance with policies and procedures approved by the Audit Committee of the Board of Directors. Derivatives are managed by a senior executive committee whose responsibilities include initiating, managing and monitoring resulting exposures. We do not enter into financial instruments for trading or speculative purposes.
As of March 31, 2016 we had $470 million of U.S. long-term variable rate debt. Our primary interest rate exposure on variable rate debt results from changes in LIBOR. However, we use interest rate swaps to manage our exposure to interest rate movements on our term credit agreement by swapping existing borrowings from floating rates to fixed rates. The notional amount of outstanding interest rate swap contracts at March 31, 2016 was $350 million. The interest rate swap contracts and term credit agreement mature in August 2024. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in a corresponding increase/decrease of approximately $1.2 million in interest payments and expense over a 12 month period.
The fair market value of our U.S. long-term fixed interest rate debt is also subject to interest rate risk. The estimated fair value of our long-term fixed-rate debt at March 31, 2016 was $382 million compared to the $367 million principal amount. We use interest rates of debt with similar terms and maturities to estimate the fair value of our debt. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A hypothetical one-percentage point increase/decrease in prevailing interest rates at March 31, 2016 would result in a corresponding decrease/increase in the fair value of our long-term fixed-rate debt of approximately $18 million.
We estimate the periodic effective interest rate on U.S. long-term fixed and variable rate debt for the first quarter was approximately 3.3% after consideration of interest rate swaps and estimated patronage refunds, excluding unused commitment fees on the revolving credit facility.
The functional currency of the Company’s New Zealand-based operations and New Zealand JV is the New Zealand dollar. Through these operations and our ownership in the New Zealand JV, we are exposed to foreign currency risk on cash held in foreign currencies and on foreign export sales and ocean freight payments that are predominantly denominated in U.S. dollars. To mitigate these risks, the New Zealand JV routinely enters into foreign currency exchange contracts and foreign currency option contracts to hedge a portion of the New Zealand JV’s foreign exchange exposure. At March 31, 2016, the New Zealand JV had foreign currency exchange contracts with a notional amount of $24 million and foreign currency option contracts with a notional amount of $89 million outstanding. The amount hedged represents 58% of forecast U.S. dollar denominated harvesting sales proceeds over the next 18 months and 35% of log trading sales proceeds over the next 3 months. 

Item 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Rayonier management is responsible for establishing and maintaining adequate disclosure controls and procedures. Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), are designed with the objective of ensuring information required to be disclosed by the Company in reports filed under the Exchange Act, such as this quarterly report on Form 10-Q, is (1) recorded, processed, summarized and reported or submitted within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Because of the inherent limitations in all control systems, no control evaluation can provide absolute assurance that all control exceptions and instances of fraud have been prevented or detected on a timely basis. Even systems determined to be effective can provide only reasonable assurance that their objectives are achieved.
Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q, our management, including the Chief Executive Officer and Chief Financial Officer, concluded the design and operation of the disclosure controls and procedures were effective as of March 31, 2016.
In the quarter ended March 31, 2016, based upon the evaluation required by paragraph (d) of SEC Rule 13a-15, there were no changes in our internal control over financial reporting that would materially affect or are reasonably likely to materially affect our internal control over financial reporting.


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Table of Contents

PART II.    OTHER INFORMATION

Item 1.
Legal Proceedings

The information set forth in Note 8Contingencies in the “Notes to the Consolidated Financial Statements” under Item 1 of Part I of this Report is incorporated herein by reference. 

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
In February 2016, the Board of Directors approved the repurchase of up to $100 million of Rayonier’s common shares (the “share repurchase program”) to be made at management’s discretion. The program has no time limit and may be suspended or discontinued at any time. There were 35,200 shares repurchased under this program in the first quarter of 2016 and there was $99.3 million, or approximately 4,023,923 shares based on the period end closing stock price of $24.68, available for repurchase as of March 31, 2016.
In 1996, we began a Common Share repurchase program (the “anti-dilutive program”) to minimize the dilutive effect of our employee incentive stock plans on earnings per share. This program limits the number of shares that may be purchased each year to the greater of 1.5% of outstanding shares at the beginning of the year or the number of incentive shares issued to employees during the year. In October 2000, July 2003 and October 2011, our Board of Directors authorized the purchase of additional shares in the program totaling 2.1 million shares. None of these shares have expiration dates. There were no shares purchased under this program in the first quarter of 2016 and there were 3,776,612 shares available for purchase at March 31, 2016.
The following table provides information regarding our purchases of Rayonier common stock during the quarter ended March 31, 2016:
Period
 
Total Number of Shares Purchased (a)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (c)
January 1 to January 31
 

 

 

 
3,776,612

February 1 to February 29
 
35,200

 

$19.59

 
35,200

 
7,800,535

March 1 to March 31
 
3,674

 

$22.59

 

 
7,800,535

Total
 
38,874

 
 
 
35,200

 


 
 
 
 
 
(a)
Includes 3,674 shares of the Company’s common stock purchased in March from employees in non-open market transactions. The shares of stock were sold by current and former employees of the Company in exchange for cash that was used to pay withholding taxes associated with the vesting of restricted stock awards under the Company’s stock incentive plan. The price per share surrendered is based on the closing price of the company’s stock on the respective vesting dates of the awards.
(b)
Purchases made in open-market transactions under the $100 million share repurchase program announced on February 10, 2016.
(c)
Maximum number of shares authorized to be purchased as of March 31, 2016 include 3,776,612 under the 1996 anti-dilutive program and approximately 4,023,923 under the share repurchase program.


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Item 6.
Exhibits
10.1

Amendment to Rayonier Investment and Savings Plan for Salaried Employees effective June 1, 2016*
Filed herewith
10.2

Rayonier Inc. Supplemental Savings Plan effective March 1, 2016*
Filed herewith
10.3

Credit Agreement dated August 5, 2015 among Rayonier Inc., Rayonier TRS Holdings Inc. and Rayonier Operating Company LLC, as Borrowers, COBANK, ACB, as Administrative Agent, Swing Line Lender and Issuing Bank, JPMORGAN CHASE BANK, N.A. And FARM CREDIT OF FLORIDA, ACA, as Co-Syndication Agents CREDIT SUISSE AG and SUNTRUST BANK, as Co-Documentation Agents and COBANK, ACB, as Sole Lead Arranger and Sole Bookrunner

Filed herewith
10.4

First Amendment and Incremental Term Loan Agreement dated April 28, 2016, by and among Rayonier Inc., Rayonier TRS Holdings Inc., Rayonier Operating Company LLC, as Borrowers, COBANK, ACB, as Administrative Agent and the several banks, financial institutions and other institutional lenders party thereto
Incorporated by reference to Exhibit 10.1 to the Registrant’s May 2, 2016 Form 8-K
10.5

2016 Guarantee Agreement dated as of April 28, 2016 among Rayonier Inc., Rayonier TRS Holdings Inc. and COBANK, ACB, as Administrative Agent
Incorporated by reference to Exhibit 10.2 to the Registrant’s May 2, 2016 Form 8-K
31.1

Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2

Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
32

Certification of Periodic Financial Reports Under Section 906 of the Sarbanes-Oxley Act of 2002
Furnished herewith
101

The following financial information from our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2016, formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2016 and 2015; (ii) the Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015; (iii) the Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2016 and the Years Ended December 31, 2015 and 2014; (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015; and (v) the Notes to Consolidated Financial Statements.

Filed herewith
 
 
 
 
 
* Management contract or compensatory plan.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RAYONIER INC.
 
 
(Registrant)
 
 
 
 
By:
/s/ H. EDWIN KIKER
 
 
H. Edwin Kiker
Chief Accounting Officer
(Duly Authorized Officer, Principal Accounting Officer)
Date: May 6, 2016





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