RAYONIER INC - FORM 10-Q - May 5, 2017

Attached files

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EX-32 - SECTION 906 CERTIFICATION OF CEO & CFO - RAYONIER INCrayonierex321q2017.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - RAYONIER INCrayonierex3121q2017.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - RAYONIER INCrayonierex3111q2017.htm
EX-10.3 - RAYONIER ANNUAL BONUS PROGRAM, AS AMENDED AND RESTATED - RAYONIER INCrayonierex1031q2017.htm
EX-10.2 - 2017 PERFORMANCE SHARE ANNUAL AWARD PROGRAM - RAYONIER INCrayonierex1021q2017.htm
EX-10.1 - AMENDMENT TO RAYONIER INVESTMENT AND SAVINGS PLAN FOR SALARIED EMPLOYEES - RAYONIER INCrayonierex1011q2017.htm



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from              to             
Commission File Number 1-6780
RAYONIER INC.
Incorporated in the State of North Carolina
I.R.S. Employer Identification No. 13-2607329
225 WATER STREET, SUITE 1400
JACKSONVILLE, FL 32202
(Principal Executive Office)
Telephone Number: (904) 357-9100

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of April 28, 2017, there were outstanding 128,827,667 Common Shares of the registrant.













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

i


PART I.        FINANCIAL INFORMATION

Item 1.         Financial Statements

RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
 
 
Three Months Ended
March 31,
 
 
2017
 
2016
SALES
 

$186,512

 

$134,843

Costs and Expenses
 
 
 
 
Cost of sales
 
136,413

 
107,971

Selling and general expenses
 
9,590

 
9,779

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

 
111,846

OPERATING INCOME
 
49,261

 
22,997

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

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

 
14,277

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

NET INCOME
 
35,083

 
15,058

Less: Net income attributable to noncontrolling interest
 
1,240

 
586

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
 
33,843

 
14,472

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

 
2,804

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

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

 
617

Total other comprehensive income (loss)
 
5,101

 
(10,353
)
COMPREHENSIVE INCOME
 
40,184

 
4,705

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

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

$38,533

 

$8,454

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

$0.27

 

$0.12

Diluted earnings per share attributable to Rayonier Inc.
 

$0.27

 

$0.12

 
 
 
 
 
Dividends declared per share
 

$0.25

 

$0.25


See Notes to Consolidated Financial Statements.

1


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

$219,357

 

$85,909

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

 
20,664

Insurance settlement receivable (Note 8)
73,000

 
—

Inventory (Note 15)
27,155

 
21,379

Prepaid expenses
14,723

 
11,807

Assets held for sale (Note 17)
9,006

 
23,171

Other current assets
8,247

 
1,874

Total current assets
384,922

 
164,804

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

 
2,291,015

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

 
70,374

PROPERTY, PLANT AND EQUIPMENT
 
 
 
Land
2,279

 
2,279

Buildings
8,094

 
7,990

Machinery and equipment
4,690

 
4,658

Construction in progress
11,013

 
8,170

Total property, plant and equipment, gross
26,076

 
23,097

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

 
14,034

RESTRICTED CASH (Note 16)
111,276

 
71,708

OTHER ASSETS
51,336

 
73,825

TOTAL ASSETS

$2,918,910

 

$2,685,760

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
 
 
 
Accounts payable

$30,956

 

$22,337

Insurance settlement payable (Note 8)
73,740

 
—

Current maturities of long-term debt
42,926

 
31,676

Accrued taxes
3,348

 
2,657

Accrued payroll and benefits
3,079

 
9,277

Accrued interest
8,321

 
5,340

Other current liabilities
20,572

 
20,679

Total current liabilities
182,942

 
91,966

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

 
1,030,205

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

 
31,856

OTHER NON-CURRENT LIABILITIES
28,888

 
34,981

COMMITMENTS AND CONTINGENCIES (Notes 6 and 8)

 

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

 
709,867

Retained earnings
689,612

 
700,887

Accumulated other comprehensive income
5,545

 
856

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

 
1,411,610

Noncontrolling interest
86,794

 
85,142

TOTAL SHAREHOLDERS’ EQUITY
1,647,294

 
1,496,752

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$2,918,910

 

$2,685,760


See Notes to Consolidated Financial Statements.

2


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


 
Common Shares
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Non-controlling Interest
 
Shareholders’
Equity
 
Shares
 
Amount
 
Balance, December 31, 2015
122,770,217

 

$708,827

 

$612,760

 

($33,503
)
 

$73,656

 

$1,361,740

Net income
—

 
—

 
211,972

 
—

 
5,798

 
217,770

Dividends ($1.00 per share)
—

 
—

 
(123,155
)
 
—

 
—

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

 
1,576

 
—

 
—

 
—

 
1,576

Stock-based compensation
—

 
5,136

 
—

 
—

 
—

 
5,136

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

 
—

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

 
—

 
—

 
5,533

 
—

 
5,533

Foreign currency translation adjustment
—

 
—

 
—

 
2,780

 
3,542

 
6,322

Cash flow hedges
—

 
—

 
—

 
22,608

 
214

 
22,822

Recapitalization of New Zealand Joint Venture
—

 
(5,398
)
 
—

 
3,438

 
1,960

 
—

Recapitalization costs
—

 
(96
)
 
—

 
—

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

 

$709,867

 

$700,887

 

$856

 

$85,142

 

$1,496,752

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

 
—

 
(14,365
)
 
—

 
—

 
(14,365
)
Net income
—

 
—

 
33,843

 
—

 
1,240

 
35,083

Dividends ($0.25 per share)
—

 
—

 
(30,753
)
 
—

 
—

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

 
2,251

 
—

 
—

 
—

 
2,251

Stock-based compensation
—

 
880

 
—

 
—

 
—

 
880

Repurchase of common shares
(298
)
 
—

 
—

 
—

 
—

 
—

Amortization of pension and postretirement plan liabilities
—

 
—

 
—

 
116

 
—

 
116

Foreign currency translation adjustment
—

 
—

 
—

 
2,002

 
430

 
2,432

Cash flow hedges
—

 


 
—

 
2,571

 
(18
)
 
2,553

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

 
152,345

 
—

 
—

 
—

 
152,345

Balance, March 31, 2017
128,760,051

 

$865,343

 

$689,612

 

$5,545

 

$86,794

 

$1,647,294


See Notes to Consolidated Financial Statements.















3


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

$35,083

 

$15,058

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

 
29,342

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

 
4,108

Stock-based incentive compensation expense
880

 
839

Deferred income taxes
5,989

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

 
617

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

Other
2,306

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

 
1,369

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

 
31,035

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

 
—

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

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

 
285,552

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

 
18

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

 
—

Repurchase of common shares made under share repurchase program
—

 
(690
)
Other
—

 
(16
)
CASH PROVIDED BY FINANCING ACTIVITIES
133,167

 
13,437

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(67
)
 
238

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

 
24,427

Balance, beginning of year
85,909

 
51,777

Balance, end of period

$219,357

 

$76,204

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

$3,695

 

$5,808

Income taxes
214

 
119

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

 
2,725

 
 
 
 
 
(a)
Interest paid is presented net of patronage payments received of $3.0 million and $0.4 million for the three months ended March 31, 2017 and March 31, 2016, respectively. For additional information on patronage payments, see Note 5 — Debt in the 2016 Form 10-K.

See Notes to Consolidated Financial Statements.

4


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


1.
BASIS OF PRESENTATION
Basis of Presentation
The unaudited consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries (“Rayonier” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements and notes reflect all adjustments (all of which are normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. These statements and notes should be read in conjunction with the financial statements and supplementary data included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC (the “2016 Form 10-K”).
Recently Adopted Standards
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, stating entities should recognize income tax consequences of intra-entity transfers of assets other than inventory in the period in which they occur. As such, the Company is required to apply the changes on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU No. 2016-16 is effective for annual periods beginning after December 15, 2017 with early adoption permitted at the beginning of an annual period for which financial statements have not been issued. Rayonier early adopted ASU No. 2016-16 in this quarterly report on Form 10-Q. See Note 7 — Income Taxes for additional information.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This update simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Rayonier adopted ASU No. 2016-09 during the first quarter ended March 31, 2017. Upon adoption, additional excess tax benefits and tax deficiencies are recorded to “Income tax (expense) benefit” in the Consolidated Statements of Income and Comprehensive Income, forfeitures are accounted for when they occur and cash paid by Rayonier when directly withholding shares for tax withholding purposes are classified as a financing activity within the statement of cash flows. The adoption of this standard did not have a material impact on the consolidated financial statements.
New Accounting Standards
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Rayonier intends to adopt ASU No. 2016-18 in the Company’s first quarter 2018 Form 10-Q. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU No. 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. ASU No. 2016-15 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.

5

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

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. ASU No. 2016-02 also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. ASU No. 2016-02 is required to be applied retrospectively to all periods presented beginning in the period of adoption. Early adoption is permitted. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements.
In May 2014, the FASB and International Accounting Standards Board (“IASB”) jointly issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), a comprehensive new revenue recognition standard that will supersede current revenue recognition guidance. The guidance provides a unified model to determine when and how revenue is recognized and will require enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date. ASU No. 2015-14 provides a one-year deferral of the effective date of the new standard, with an option for organizations to adopt early based on the original effective date.  In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing. The update clarifies the guidance for identifying performance obligations. In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The update clarifies the guidance for assessing collectibility, presenting sales taxes and other similar taxes collected from customers, noncash consideration, contract modifications at transition, completed contracts at transition and disclosing the accounting change in the period of adoption. In February 2017, the FASB issued ASU No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The update clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. This standard will be effective for Rayonier beginning January 1, 2018 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements and has completed a preliminary analysis of the specific impacts to the Southern Timber, Pacific Northwest Timber, New Zealand Timber and Real Estate segments.

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

2.
JOINT VENTURE INVESTMENT
Matariki Forestry Group
The Company maintains a controlling financial interest in Matariki Forestry Group (the "New Zealand JV"), a joint venture that owns or leases approximately 0.4 million legal acres of New Zealand timberland. Accordingly, the Company consolidates the New Zealand JV’s balance sheet and results of operations. The portions of the consolidated financial position and results of operations attributable to the New Zealand JV’s 23% noncontrolling interest are shown separately within the Consolidated Statements of Income and Comprehensive Income and Consolidated Statements of Shareholders’ Equity. Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier Inc., serves as the manager of the New Zealand JV.


6

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

3.
SEGMENT AND GEOGRAPHICAL INFORMATION
Sales between operating segments are made based on estimated fair market value and intercompany sales, purchases and profits (losses) are eliminated in consolidation. The Company evaluates financial performance based on segment operating income and Adjusted EBITDA. Asset information is not reported by segment, as the Company does not produce asset information by segment internally.
Operating income as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income. Certain income (loss) items in the Consolidated Statements of Income and Comprehensive Income are not allocated to segments. These items, which include gains (losses) from certain asset dispositions, interest income (expense), miscellaneous income (expense) and income tax (expense) benefit, are not considered by management to be part of segment operations and are included under “Corporate and other” or “unallocated interest expense and other.”
The following tables summarize the segment information for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended
March 31,
SALES
 
2017
 
2016
Southern Timber
 

$32,715

 

$44,740

Pacific Northwest Timber
 
24,792

 
19,309

New Zealand Timber
 
40,740

 
36,023

Real Estate (a)
 
54,289

 
13,363

Trading
 
33,976

 
21,408

Total
 

$186,512

 

$134,843

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

$13,939

 

$15,753

Pacific Northwest Timber
 
(878
)
 
1,385

New Zealand Timber
 
10,243

 
4,744

Real Estate (a)
 
29,665

 
4,225

Trading
 
1,097

 
350

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

 
22,997

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

$41,364

 

$14,277

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

7

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

 
 
Three Months Ended
March 31,
DEPRECIATION, DEPLETION AND AMORTIZATION
 
2017
 
2016
Southern Timber
 

$12,452

 

$16,556

Pacific Northwest Timber
 
10,210

 
4,639

New Zealand Timber
 
5,407

 
4,860

Real Estate (a)
 
10,707

 
3,203

Trading
 
—

 
—

Corporate and other
 
100

 
84

Total
 

$38,876

 

$29,342

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

 
—

Pacific Northwest Timber
 
—

 
—

New Zealand Timber
 
—

 
1,824

Real Estate (a)
 
10,222

 
2,284

Trading
 
—

 
—

Corporate and other
 
—

 
—

Total
 

$10,222

 

$4,108

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


8

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

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

$350,000

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

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

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

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

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

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

Total debt
1,074,412

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

$1,028,068

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

2018
—

2019
—

2020
40,000

2021
—

Thereafter
991,486

Total Debt

$1,074,311

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

9

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

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


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

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

An analysis of higher and better use timberlands and real estate development costs from December 31, 2016 to March 31, 2017 is shown below:
 
Higher and Better Use Timberlands and Real Estate Development Investments
 
Land and Timber
 
Development Investments
 
Total
Non-current portion at December 31, 2016

$59,956

 

$10,418

 

$70,374

Plus: Current portion (a)
5,096

 
11,963

 
17,059

Total Balance at December 31, 2016
65,052

 
22,381

 
87,433

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

 
(359
)
Capitalized real estate development investments (b)
—

 
2,185

 
2,185

Capital expenditures (silviculture)
88

 
—

 
88

Intersegment transfers
4,144

 
—

 
4,144

Total Balance at March 31, 2017
68,487

 
24,558

 
93,045

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

$62,809

 

$10,904

 

$73,713

 
 
 
 
 
(a)
The current portion of Higher and Better Use Timberlands and Real Estate Development Investments is recorded in Inventory. See Note 15 — Inventory for additional information.
(b)
Capitalized real estate development investments includes $0.1 million of capitalized interest.


10

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

6.
COMMITMENTS
The Company leases certain buildings, machinery, and equipment under various operating leases. The Company also has long-term lease agreements on certain timberlands in the Southern U.S. and New Zealand. U.S. leases typically have initial terms of approximately 30 to 65 years, with renewal provisions in some cases. New Zealand timberland lease terms range between 30 and 99 years. Such leases are generally non-cancellable and require minimum annual rental payments.
At March 31, 2017, the future minimum payments under non-cancellable operating leases, timberland leases and other commitments were as follows:
 
Operating
Leases
 
Timberland
Leases (a)
 
Commitments (b)
 
Total
Remaining 2017

$1,300

 

$7,209

 

$8,561

 

$17,070

2018
1,022

 
9,163

 
7,181

 
17,366

2019
813

 
8,688

 
7,174

 
16,675

2020
639

 
8,284

 
7,174

 
16,097

2021
554

 
8,342

 
7,174

 
16,070

Thereafter (c)
1,187

 
152,075

 
22,223

 
175,485

 

$5,515

 

$193,761

 

$59,487

 

$258,763

 
 
 
 
 
(a)
The majority of timberland leases are subject to increases or decreases based on either the Consumer Price Index, Producer Price Index or market rates.
(b)
Commitments include payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps) and construction of the Company’s office building.
(c)
Includes 20 years of future minimum payments for perpetual Crown Forest Licenses (“CFL”). A CFL consists of a license to use public or government owned land to operate a commercial forest. The CFL's extend indefinitely and may only be terminated upon a 35-year termination notice from the government. If no termination notice is given, the CFLs renew automatically each year for a one-year term. As of March 31, 2017, the New Zealand JV has four CFL’s under termination notice, two that are currently being relinquished as harvest activities are concluding, one each in 2034 and 2044, as well as two fixed term CFL’s expiring in 2062. The annual license fee is determined based on current market rental value, with triennial rent reviews.

11

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

7.
INCOME TAXES
The operations conducted by the Company’s REIT entities are generally not subject to U.S. federal and state income tax. The New Zealand JV is subject to corporate level tax in New Zealand. Non-REIT qualifying operations are conducted by the Company’s TRS. The primary businesses performed in Rayonier’s TRS include log trading and certain real estate activities, such as the sale and entitlement of development HBU properties. For the three months ended March 31, 2017, the Company recorded income tax expense of $6.3 million. For the three months ended March 31, 2016, income tax benefit was $0.8 million.

Provision for Income Taxes

The Company’s effective tax rate is below the 35.0% U.S. statutory rate due to tax benefits associated with being a REIT. The Company’s annualized effective tax rate (“AETR”) for the three months ended March 31, 2017 and March 31, 2016 was 15.6% and (5.5)%, respectively. The increase in income tax expense, and the corresponding AETR for the three months ended March 31, 2017, is principally related to the New Zealand JV.

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

12

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

8.
CONTINGENCIES

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

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

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

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

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

•
Brown v. Rayonier Inc. et al, Civil Action No. 1:14-cv-08986, initially filed in the United States District Court for the Southern District of New York and later transferred to the United States District Court for the Middle District of Florida and assigned as Civil Action No. 3:14-cv-01474.
    
On January 9, 2015, the five securities actions were consolidated into one putative class action entitled In re Rayonier Inc. Securities Litigation, Case No. 3:14-cv-01395-TJC-JBT, in the United States District Court for the Middle District of Florida. The plaintiffs alleged that the defendants made false and/or misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs sought unspecified monetary damages and attorneys’ fees and costs. Two shareholders, the Pension Trust Fund for Operating Engineers and the Lake Worth Firefighters’ Pension Trust Fund moved for appointment as lead plaintiff on January 12, 2015, which was granted on February 25, 2015. On April 7, 2015, the plaintiffs filed a Consolidated Class Action Complaint (the “Consolidated Complaint”). In the Consolidated Complaint, plaintiffs added allegations as to and added as a defendant N. Lynn Wilson, a former officer of Rayonier. With the filing of the Consolidated Complaint, David L. Nunes and H. Edwin Kiker were dropped from the case as defendants. Defendants timely filed Motions to Dismiss the Consolidated Complaint on May 15, 2015. After oral argument on Defendants' motions on August 25, 2015, the Court dismissed the Consolidated Complaint without prejudice, allowing plaintiffs leave to refile. Plaintiffs filed the Amended Consolidated Class Action Complaint (the “Amended Complaint”) on September 25, 2015, which continued to assert claims against the Company, as well as Ms. Wilson and Messrs. Boynton and Vanden Noort. Defendants timely filed Motions to Dismiss the Amended Complaint on October 26, 2015. The court denied those motions on May 20, 2016. At December 31, 2016, the case continued to be in the discovery phase and the Company could not determine whether there was a reasonable likelihood a material loss had been incurred nor could the range of any such loss be estimated. On March 13, 2017, the Company reached an agreement in principle to settle the case and all parties executed a term sheet memorializing such agreement. The parties executed and filed with the Court the Stipulation and Agreement of Settlement on April 12, 2017 (the “Settlement Agreement”), which the Settlement Agreement included the material terms contained in the term sheet executed on March 13. Pursuant to the terms of the Settlement Agreement, which is subject to Court approval and requests for exclusion by members of the settlement class, the Company agreed to cause certain of its directors’ and officers’ liability insurance carriers to fund a settlement payment to the class of $73 million. In connection with the settlement, the Company agreed to reimburse one of its insurance carriers approximately $740,000 for certain disputed pre-litigation expenses, which reimbursement is expected to be made in the first half of 2017. The amounts agreed to on March 13, 2017, including the realized amount to be funded by the insurance carriers, were reflected in the Company’s Consolidated Financial Statements as of March 31, 2017.


13

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

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

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

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

$5,366

 
—

Guarantees (b)
 
2,254

 
43

Surety bonds (c)
 
683

 
—

Total financial commitments
 

$8,303

 

$43

 
 
 
 
 
(a)
Approximately $3.8 million of the standby letters of credit serve as credit support for infrastructure at the Company’s Wildlight development project. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation. These letters of credit will expire at various dates during 2017 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in 2004, the Company issued a make-whole agreement pursuant to which it guaranteed $2.3 million of obligations of a special-purpose entity that was established to complete the monetization. At March 31, 2017, the Company has a de minimis liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(c)
Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. Rayonier has also obtained performance bonds to secure the development activity at the Company’s Wildlight development project. These surety bonds expire at various dates during 2017 and 2018 and are expected to be renewed as required.
 

14

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

10.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Net Income
 

$35,083

 

$15,058

Less: Net income attributable to noncontrolling interest
 
1,240

 
586

Net income attributable to Rayonier Inc.
 

$33,843

 

$14,472

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

 
122,556,239

Dilutive effect of:
 
 
 
 
Stock options
 
106,690

 
53,526

Performance and restricted shares
 
228,275

 
35,124

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

 
122,644,889

 
 
 
 
 
Basic earnings per common share attributable to Rayonier Inc.:
 

$0.27

 

$0.12

 
 
 
 
 
Diluted earnings per common share attributable to Rayonier Inc.:
 

$0.27

 

$0.12


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

 
1,095,453

Total
 
592,653

 
1,095,453




15

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

11.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks.
Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented.
Foreign Currency Exchange and Option Contracts
The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2017, foreign currency exchange contracts and foreign currency option contracts had maturity dates through February 2019 and August 2018, respectively.
Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.
In March 2017, the Company purchased foreign exchange forward contracts (notional amount of $11.3 million) to mitigate the risk of fluctuations in foreign exchange rates when making shareholder loan payments which are denominated in U.S. dollars. For additional information on the shareholder loan see Note 4 — Debt. The New Zealand JV typically hedges 75% to 100% of its estimated foreign currency exposure with respect to the following three months forecasted distributions, up to 75% of forecasted distributions for the forward three to six months and up to 50% of the forward six to 12 months. As of March 31, 2017, the change in fair value of the foreign exchange forward contracts of $0.1 million was recorded in “Interest income and miscellaneous (income) expense, net” as it did not qualify for hedge accounting treatment.
Interest Rate Swaps
The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.
In August 2015, the Company entered into a nine-year interest rate swap agreement for a notional amount of $170 million. This swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.20%. Together with the bank margin of 1.63%, this results in a rate of 3.83% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

16

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

Also, in August 2015, the Company entered into a nine-year forward interest rate swap agreement with a start date in April 2016 for a notional amount of $180 million. This swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.35%. Together with the bank margin of 1.63%, this results in a rate of 3.97% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.
In April 2016, the Company entered into two 10-year interest rate swap agreements, each for a notional amount of $100 million. These swap agreements fix the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 to an average rate of 1.60%. Together with the bank margin of 1.90%, this results in a rate of 3.50% before estimated patronage payments. These derivative instruments have been designated as interest rate cash flow hedges and qualify for hedge accounting.
In July 2016, the Company entered into an interest rate swap agreement for a notional amount of $100 million through May 2026. This swap agreement fixes the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 from LIBOR to an average rate of 1.26%. Together with the bank margin of 1.90%, this results in a rate of 3.16% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.
The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016.
 
 
 
Three Months Ended
March 31,
 
Income Statement Location
 
2017
 
2016
Derivatives designated as cash flow hedges:
 
 
 
 
 
Foreign currency exchange contracts
Other comprehensive income (loss)
 

($71
)
 

$711

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

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

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

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

 
895

 
Interest income and miscellaneous income (expense), net
 
125

 
—

Foreign currency option contracts
Other operating income, net
 
—

 
258

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

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

17

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

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

$61,200

 

$44,800

Foreign currency option contracts
81,000

 
91,000

Interest rate swaps
650,000

 
650,000

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

 
—


18

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

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:
 
Location on Balance Sheet
 
Fair Value Assets / (Liabilities) (a)
 
 
 
March 31, 2017
 
December 31, 2016
Derivatives designated as cash flow hedges:
 
 
 
 
Foreign currency exchange contracts
Other current assets
 

$730

 

$692

 
Other assets
 
102

 
33

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

Foreign currency option contracts
Other current assets
 
718

 
1,064

 
Other assets
 
167

 
327

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

 
17,204

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

 
—

 
 
 
 
 
 
Total derivative contracts:
 
 
 
 
 
Other current assets
 
 

$1,569

 

$1,756

Other assets
 
 
18,375

 
17,564

Total derivative assets
 
 

$19,944

 

$19,320

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

($5,013
)
 

($7,240
)
 
 
 
 
 
(a)
See Note 12 — Fair 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.


19

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

12.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
A three-level hierarchy that prioritizes the inputs used to measure fair value was established in the Accounting Standards Codification as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. (a)
The following table presents the carrying amount and estimated fair values of financial instruments held by the Company at March 31, 2017 and December 31, 2016, using market information and what the Company believes to be appropriate valuation methodologies under GAAP:
 
March 31, 2017
 
December 31, 2016
Asset (Liability) (a)
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
 
 
Level 1
 
Level 2
Cash and cash equivalents

$219,357

 

$219,357

 
—

 

$85,909

 

$85,909

 
—

Restricted cash (b)
111,276

 
111,276

 
—

 
71,708

 
71,708

 
—

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

 
(43,250
)
 
(31,676
)
 
—

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

 
(1,031,648
)
 
(1,030,205
)
 
—

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

 
—

 
13,858

 
11,225

 
—

 
11,225

Foreign currency exchange contracts (d)
723

 
—

 
723

 
464

 
—

 
464

Foreign currency option contracts (d)
350

 
—

 
350

 
391

 
—

 
391

 
 
 
 
 
(a)
The Company did not have Level 3 assets or liabilities at March 31, 2017.
(b)
Restricted cash represent the proceeds from like-kind exchange sales deposited with a third-party intermediary and cash held in escrow for a real estate sale. See Note 16 — Restricted Cash for additional information.
(c)
The carrying amount of long-term debt is presented net of capitalized debt costs on non-revolving debt.
(d)
See Note 11 — Derivative Financial Instruments and Hedging Activities for information regarding the Balance Sheet classification of the Company’s derivative financial instruments.
Rayonier uses the following methods and assumptions in estimating the fair value of its financial instruments:
Cash and cash equivalents and Restricted cash — The carrying amount is equal to fair market value.
Debt — The fair value of fixed rate debt is based upon quoted market prices for debt with similar terms and maturities. The variable rate debt adjusts with changes in the market rate, therefore the carrying value approximates fair value.
Interest rate swap agreements — The fair value of interest rate contracts is determined by discounting the expected future cash flows, for each instrument, at prevailing interest rates.
Foreign currency exchange contracts — The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate.
Foreign currency option contracts — The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.


20

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

13.
EMPLOYEE BENEFIT PLANS
The Company has one qualified non-contributory defined benefit pension plan covering a portion of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plan. Both plans are closed to new participants. Effective December 31, 2016, the Company froze benefits for all employees participating in the pension plan. In lieu of the pension plan, the Company provides those employees with an enhanced 401(k) plan match. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recorded are shown in the following table:
 
Pension
 
Postretirement
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
Service cost
—

 

$327

 

$13

 

$2

Interest cost
815

 
869

 
2

 
12

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

 
—

Amortization of losses (gains)
116

 
629

 
—

 
(12
)
Net periodic benefit (gain) cost

($14
)
 

$817

 

$15

 

$2

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

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

$4,110

 

$4,559

Other non-timber income
 
2,798

 
519

Foreign currency income (loss)
 
313

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

 
(522
)
Gain on foreign currency derivatives (a)
 
—

 
1,153

Miscellaneous income, net
 
879

 
490

Total
 

$8,752

 

$5,904

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


21

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

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

$19,332

 

$17,059

Log inventory
7,823

 
4,320

Total inventory

$27,155

 

$21,379

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

16.
RESTRICTED CASH
In order to qualify for like-kind exchange (“LKE”) treatment, the proceeds from real estate sales must be deposited with a third-party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of March 31, 2017 and December 31, 2016, the Company had $111.3 million and $71.7 million, respectively, of proceeds from real estate sales classified as restricted cash which were deposited with an LKE intermediary as well as cash held in escrow for a real estate sale.

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


22

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

18.
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The following table summarizes the changes in AOCI by component for the three months ended March 31, 2017 and the year ended December 31, 2016. All amounts are presented net of tax and exclude portions attributable to noncontrolling interest.
 
Foreign currency translation gains/ (losses)
 
Net investment hedges of New Zealand JV
 
Cash flow hedges
 
Employee benefit plans
 
Total
Balance as of December 31, 2015

($2,450
)
 

$6,271

 

($11,592
)
 

($25,732
)
 

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

 
—

 
22,024

 
3,020

(b)
32,431

Amounts reclassified from accumulated other comprehensive loss
—

 
(4,606
)
 
583

 
2,513

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

 
(4,606
)
 
22,607

 
5,533

 
30,921

Recapitalization of New Zealand JV
3,622

 
—

 
(184
)
 
—

 
3,438

Balance as of December 31, 2016

$8,559

 

$1,665

 

$10,831

 

($20,199
)
 

$856

Other comprehensive income before reclassifications
2,002

 
—

 
2,975

(a)
—

 
4,977

Amounts reclassified from accumulated other comprehensive income
—

 
—

 
(404
)
 
116

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

 
—

 
2,571


116


4,689

Balance as of March 31, 2017

$10,561

 

$1,665

 

$13,402

 

($20,083
)
 

$5,545

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

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

($446
)
 

$334

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

 
Other operating income, net
Noncontrolling interest
 
168

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

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

($404
)
 

$413

 
 

23

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

19.
CONSOLIDATING FINANCIAL STATEMENTS
The condensed consolidating financial information below follows the same accounting policies as described in the consolidated financial statements, except for the use of the equity method of accounting to reflect ownership interests in wholly-owned subsidiaries, which are eliminated upon consolidation, and the allocation of certain expenses of Rayonier Inc. incurred for the benefit of its subsidiaries.
In March 2012, Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022. In connection with these notes, the Company provides the following condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.
The subsidiary guarantors, Rayonier Operating Company LLC (“ROC”) and Rayonier TRS Holdings Inc., are wholly-owned by the parent company, Rayonier Inc. The notes are fully and unconditionally guaranteed on a joint and several basis by the guarantor subsidiaries.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 AND COMPREHENSIVE INCOME
 
For the Three Months Ended March 31, 2017
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES
—

 
—

 

$186,512

 
—

 

$186,512

Costs and Expenses
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
—

 
136,413

 
—

 
136,413

Selling and general expenses
—

 
3,536

 
6,054

 
—

 
9,590

Other operating expense (income), net
—

 
111

 
(8,863
)
 
—

 
(8,752
)
 
—

 
3,647

 
133,604

 
—

 
137,251

OPERATING (LOSS) INCOME
—

 
(3,647
)
 
52,908

 
—

 
49,261

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

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

 
689

 
(2,373
)
 
—

 
518

Equity in income from subsidiaries
34,780

 
42,744

 
—

 
(77,524
)
 
—

INCOME BEFORE INCOME TAXES
33,843

 
34,928

 
50,117

 
(77,524
)
 
41,364

Income tax expense
—

 
(148
)
 
(6,133
)
 
—

 
(6,281
)
NET INCOME
33,843

 
34,780

 
43,984

 
(77,524
)
 
35,083

Less: Net income attributable to noncontrolling interest
—

 
—

 
1,240

 
—

 
1,240

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
33,843

 
34,780

 
42,744

 
(77,524
)
 
33,843

OTHER COMPREHENSIVE INCOME
 
 


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

 
—

 
2,432

 
(2,002
)
 
2,432

Cash flow hedges, net of income tax
2,572

 
2,633

 
(80
)
 
(2,572
)
 
2,553

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

 
116

 
—

 
(116
)
 
116

Total other comprehensive income
4,690

 
2,749

 
2,352

 
(4,690
)
 
5,101

COMPREHENSIVE INCOME
38,533

 
37,529

 
46,336

 
(82,214
)
 
40,184

Less: Comprehensive income attributable to noncontrolling interest
—

 
—

 
1,651

 
—

 
1,651

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.

$38,533

 

$37,529

 

$44,685

 

($82,214
)
 

$38,533

 
 
 
 
 
 
 
 
 
 




24

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

 
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
 AND COMPREHENSIVE INCOME (LOSS)
 
For the Three Months Ended March 31, 2016
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
SALES
—

 
—

 

$134,843

 
—

 

$134,843

Costs and Expenses
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
—

 
107,971

 
—

 
107,971

Selling and general expenses
—

 
2,938

 
6,841

 
—

 
9,779

Other operating (income) expense, net
—

 
(1,155
)
 
(4,749
)
 
—

 
(5,904
)
 
—

 
1,783

 
110,063

 
—

 
111,846

OPERATING (LOSS) INCOME
—

 
(1,783
)
 
24,780

 
—

 
22,997

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

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

 
681

 
(4,341
)
 
—

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

 
18,997

 
—

 
(34,570
)
 
—

INCOME BEFORE INCOME TAXES
14,472

 
15,751

 
18,624

 
(34,570
)
 
14,277

Income tax (expense) benefit
—

 
(178
)
 
959

 
—

 
781

NET INCOME
14,472

 
15,573

 
19,583

 
(34,570
)
 
15,058

Less: Net income attributable to noncontrolling interest
—

 
—

 
586

 
—

 
586

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
14,472

 
15,573

 
18,997

 
(34,570
)
 
14,472

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of income tax
7,288

 
(4,606
)
 
7,410

 
(7,288
)
 
2,804

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

 
13,923

 
(13,774
)
Amortization of pension and postretirement plans, net of income tax
617

 
617

 
—

 
(617
)
 
617

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

 
6,018

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

 
(3,302
)
 
28,105

 
(28,552
)
 
4,705

Less: Comprehensive loss attributable to noncontrolling interest
—

 
—

 
(3,749
)
 
—

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

$8,454

 

($3,302
)
 

$31,854

 

($28,552
)
 

$8,454

 
 
 
 
 
 
 
 
 
 


25

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, 2017
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$157,916

 

$18,524

 

$42,917

 
—

 

$219,357

Accounts receivable, less allowance for doubtful accounts
—

 
946

 
32,488

 
—

 
33,434

Insurance settlement receivable
73,000

 
—

 
—

 
—

 
73,000

Inventory
—

 
—

 
27,155

 
—

 
27,155

Prepaid expenses
—

 
1,839

 
12,884

 
—

 
14,723

Assets held for sale
—

 
—

 
9,006

 
—

 
9,006

Other current assets
—

 
20

 
8,227

 
—

 
8,247

Total current assets
230,916

 
21,329

 
132,677

 
—

 
384,922

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

 
—

 
2,280,814

 
—

 
2,280,814

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT INVESTMENTS
—

 
—

 
73,713

 
—

 
73,713

NET PROPERTY, PLANT AND EQUIPMENT
—

 
141

 
16,708

 
—

 
16,849

RESTRICTED CASH
—

 
—

 
111,276

 
—

 
111,276

INVESTMENT IN SUBSIDIARIES
1,434,995

 
2,715,947

 
—

 
(4,150,942
)
 
—

INTERCOMPANY RECEIVABLE
29,866

 
(615,867
)
 
586,001

 
—

 
—

OTHER ASSETS
2

 
10,780

 
40,554

 
—

 
51,336

TOTAL ASSETS

$1,695,779

 

$2,132,330

 

$3,241,743

 

($4,150,942
)
 

$2,918,910

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 

 
 
CURRENT LIABILITIES
 
 
 
 
 
 

 
 
Accounts payable
—

 

$4,990

 

$25,966

 
—

 

$30,956

Insurance settlement payable
73,740

 
—

 
—

 
—

 
73,740

Current maturities of long-term debt
31,601

 
—

 
11,325

 
—

 
42,926

Accrued taxes
—

 
28

 
3,320

 
—

 
3,348

Accrued payroll and benefits
—

 
1,423

 
1,656

 
—

 
3,079

Accrued interest
6,094

 
1,973

 
254

 
—

 
8,321

Other current liabilities
—

 
473

 
20,099

 
—

 
20,572

Total current liabilities
111,435

 
8,887

 
62,620

 
—

 
182,942

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
291,557

 
663,425

 
73,086

 
—

 
1,028,068

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

 
32,402

 
(684
)
 
—

 
31,718

OTHER NON-CURRENT LIABILITIES
—

 
11,584

 
17,304

 
—

 
28,888

INTERCOMPANY PAYABLE
(267,713
)
 
(18,963
)
 
286,676

 
—

 
—

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

 
1,434,995

 
2,715,947

 
(4,150,942
)
 
1,560,500

Noncontrolling interest
—

 
—

 
86,794

 
—

 
86,794

TOTAL SHAREHOLDERS’ EQUITY
1,560,500

 
1,434,995

 
2,802,741

 
(4,150,942
)
 
1,647,294

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$1,695,779

 

$2,132,330

 

$3,241,743

 

($4,150,942
)
 

$2,918,910



26

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, 2016
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

$21,453

 

$9,461

 

$54,995

 
—

 

$85,909

Accounts receivable, less allowance for doubtful accounts
—

 
2,991

 
17,673

 
—

 
20,664

Inventory
—

 
—

 
21,379

 
—

 
21,379

Prepaid expenses
—

 
427

 
11,380

 
—

 
11,807

Assets held for sale
—

 
—

 
23,171

 
—

 
23,171

Other current assets
—

 
236

 
1,638

 
—

 
1,874

Total current assets
21,453

 
13,115

 
130,236

 
—

 
164,804

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

 
—

 
2,291,015

 
—

 
2,291,015

HIGHER AND BETTER USE TIMBERLANDS AND REAL ESTATE DEVELOPMENT INVESTMENTS
—

 
—

 
70,374

 
—

 
70,374

NET PROPERTY, PLANT AND EQUIPMENT
—

 
177

 
13,857

 
—

 
14,034

RETRICTED CASH
—

 
—

 
71,708

 
—

 
71,708

INVESTMENT IN SUBSIDIARIES
1,422,081

 
2,671,428

 
—

 
(4,093,509
)
 
—

INTERCOMPANY RECEIVABLE
26,472

 
(611,571
)
 
585,099

 
—

 
—

OTHER ASSETS
2

 
46,846

 
26,977

 
—

 
73,825

TOTAL ASSETS

$1,470,008

 

$2,119,995

 

$3,189,266

 

($4,093,509
)
 

$2,685,760

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
Accounts payable
—

 

$1,194

 

$21,143

 
—

 

$22,337

Current maturities of long-term debt
31,676

 
—

 
—

 
—

 
31,676

Accrued taxes
—

 
(111
)
 
2,768

 
—

 
2,657

Accrued payroll and benefits
—

 
5,013

 
4,264

 
—

 
9,277

Accrued interest
3,047

 
2,040

 
253

 
—

 
5,340

Other current liabilities
—

 
165

 
20,514

 
—

 
20,679

Total current liabilities
34,723

 
8,301

 
48,942

 
—

 
91,966

LONG-TERM DEBT, NET OF DEFERRED FINANCING COSTS
291,390

 
663,343

 
75,472

 
—

 
1,030,205

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

 
32,541

 
(685
)
 
—

 
31,856

OTHER NON-CURRENT LIABILITIES
—

 
12,690

 
22,291

 
—

 
34,981

INTERCOMPANY PAYABLE
(267,715
)
 
(18,961
)
 
286,676

 
—

 
—

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,411,610

 
1,422,081

 
2,671,428

 
(4,093,509
)
 
1,411,610

Noncontrolling interest
—

 
—

 
85,142

 
—

 
85,142

TOTAL SHAREHOLDERS’ EQUITY
1,411,610

 
1,422,081

 
2,756,570

 
(4,093,509
)
 
1,496,752

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$1,470,008

 

$2,119,995

 

$3,189,266

 

($4,093,509
)
 

$2,685,760



27

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, 2017
 
Rayonier Inc.
(Parent
Issuer)
 
Subsidiary Guarantors
 
Non-
guarantors
 
Consolidating
Adjustments
 
Total
Consolidated
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

($1,192
)
 

$36,931

 

($1,796
)
 
—

 

$33,943

INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
—

 
(14,362
)
 
—

 
(14,362
)
Real estate development investments
—

 
—

 
(2,185
)
 
—

 
(2,185
)
Purchase of timberlands
—

 
—

 
(11,293
)
 
—

 
(11,293
)
Net proceeds from large disposition
—

 
—

 
42,034

 
—

 
42,034

Rayonier office building under construction
—

 
—

 
(2,604
)
 
—

 
(2,604
)
Change in restricted cash
—

 
—

 
(39,568
)
 
—

 
(39,568
)
Investment in subsidiaries
—

 
2,636

 
—

 
(2,636
)
 
—

Other
—

 
—

 
(5,617
)
 
—

 
(5,617
)
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES
—

 
2,636

 
(33,595
)
 
(2,636
)
 
(33,595
)
FINANCING ACTIVITIES
 
 
 
 
 
 

 
 
Issuance of debt
—

 
15,000

 
14,719

 
—

 
29,719

Repayment of debt
—

 
(15,000
)
 
(5,530
)
 
—

 
(20,530
)
Dividends paid
(30,618
)
 
—

 
—

 
—

 
(30,618
)
Proceeds from the issuance of common shares
2,251

 
—

 
—

 
—

 
2,251

Issuance of shares under equity offering
152,345

 
—

 
—

 
—

 
152,345

Intercompany distributions
13,677

 
(30,504
)
 
14,191

 
2,636

 
—

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
137,655

 
(30,504
)
 
23,380

 
2,636

 
133,167

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

 
—

 
(67
)
 
—

 
(67
)
CASH AND CASH EQUIVALENTS
 
 
 
 
 
 

 
 
Change in cash and cash equivalents
136,463

 
9,063

 
(12,078
)
 
—

 
133,448

Balance, beginning of year
21,453

 
9,461

 
54,995

 
—

 
85,909

Balance, end of period

$157,916

 

$18,524

 

$42,917

 
—

 

$219,357


28

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
)
Rayonier office building under construction
—

 
—

 
(186
)
 
—

 
(186
)
Change in restricted cash
—

 
—

 
10,613

 
—

 
10,613

Investment in subsidiaries
—

 
1,136

 
—

 
(1,136
)
 
—

Other
—

 
—

 
(1,404
)
 
—

 
(1,404
)
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



29




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 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, 2016 (the “2016 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, Rayonier’s business strategies, including expected harvest schedules, timberland acquisitions, sales of non-strategic timberlands, the anticipated benefits of Rayonier’s business strategies, 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 2016 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.
Non-GAAP Measures
To supplement Rayonier’s financial statements presented in accordance with generally accepted accounting principles in the United States (“GAAP”), Rayonier uses certain non-GAAP measures, including “cash available for distribution,” and “Adjusted EBITDA,” which are defined and further explained in Performance and Liquidity Indicators below. Reconciliation of such measures to the nearest GAAP measures can also be found in Performance and Liquidity Indicators below. Rayonier’s definitions of these non-GAAP measures may differ from similarly titled measures used by others. These non-GAAP measures should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP.


30


Our Company
We are a leading timberland real estate investment trust (“REIT”) with assets located in some of the most productive softwood timber growing regions in the United States 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, 2017, we owned or leased under long-term agreements approximately 2.6 million acres of timberlands located in the U.S. South (1.82 million acres) and U.S. Pacific Northwest (378,000 acres). We also have a 77% ownership interest in Matariki Forestry Group, a joint venture (“New Zealand JV”), that owns or leases approximately 434,000 acres (298,000 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. 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.
Industry and Market Conditions
The demand for timber is directly related to the underlying demand for pulp, paper, packaging, 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.
The Company is also subject to the risk of 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, timberland lease payments and certain payroll costs). Other costs include amortization of capitalized costs related to road and bridge construction and software, 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 2016 Form 10-K.

Discussion of Timber Inventory and Sustainable Yield
See Item 1 — Business — Discussion of Timber Inventory and Sustainable Yield in the 2016 Form 10-K.

31



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, 2017 and December 31, 2016:
(acres in 000s)
As of March 31, 2017
 
As of December 31, 2016
 
Owned
 
Leased
 
Total
 
Owned
 
Leased
 
Total
Southern
 
 
 
 
 
 
 
 
 
 
 
Alabama
255

 
24

 
279

 
284

 
24

 
308

Arkansas
—

 
14

 
14

 
—

 
14

 
14

Florida
282

 
92

 
374

 
281

 
92

 
373

Georgia
554

 
105

 
659

 
554

 
107

 
661

Louisiana
145

 
1

 
146

 
145

 
1

 
146

Mississippi
67

 
—

 
67

 
67

 
—

 
67

Oklahoma
92

 
—

 
92

 
92

 
—

 
92

Tennessee
1

 
—

 
1

 
1

 
—

 
1

Texas
185

 
—

 
185

 
187

 
—

 
187

 
1,581


236


1,817

 
1,611

 
238

 
1,849

 
 
 
 
 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
 
 
 
 
Oregon
61

 
—

 
61

 
61

 
—

 
61

Washington
316

 
1

 
317

 
316

 
1

 
317

 
377

 
1

 
378

 
377

 
1

 
378

 
 
 
 
 
 
 
 
 
 
 
 
New Zealand (a)
179

 
255

 
434

 
179

 
254

 
433

Total
2,137

 
492

 
2,629

 
2,167

 
493

 
2,660

 
 
 
 
 
(a)
Represents legal acres owned and leased by the New Zealand JV, in which Rayonier owns a 77% interest. As of March 31, 2017, legal acres in New Zealand were comprised of 298,000 plantable acres and 136,000 non-productive acres.

32


The following tables detail activity for owned and leased acres in our timberland holdings by state from December 31, 2016 to March 31, 2017:
(acres in 000s)
Acres Owned
 
December 31, 2016
 
Acquisitions
 
Sales
 
March 31, 2017
Southern
 
 
 
 
 
 
 
Alabama
284

 
—

 
(29
)
 
255

Florida
281

 
1

 
—

 
282

Georgia
554

 
—

 
—

 
554

Louisiana
145

 
—

 
—

 
145

Mississippi
67

 
—

 
—

 
67

Oklahoma
92

 
—

 
—

 
92

Tennessee
1

 
—

 
—

 
1

Texas
187

 
—

 
(2
)
 
185

 
1,611

 
1

 
(31
)
 
1,581

 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
Oregon
61

 
—

 
—

 
61

Washington
316

 
—

 
—

 
316

 
377

 
—

 
—

 
377

 
 
 
 
 
 
 
 
New Zealand (a)
179

 
—

 
—

 
179

Total
2,167

 
1

 
(31
)
 
2,137

 
 
 
 
 
(a)
Represents legal acres owned by the New Zealand JV, in which Rayonier has a 77% interest.
(acres in 000s)
Acres Leased
 
December 31, 2016
 
New Leases
 
Expired Leases (a)
 
March 31, 2017
Southern
 
 
 
 
 
 
 
Alabama
24

 
—

 
—

 
24

Arkansas
14

 
—

 
—

 
14

Florida
92

 
—

 
—

 
92

Georgia
107

 
—

 
(2
)
 
105

Louisiana
1

 
—

 
—

 
1

 
238

 
—

 
(2
)
 
236

 
 
 
 
 
 
 
 
Pacific Northwest
 
 
 
 
 
 
 
Washington
1

 
—

 
—

 
1

 
 
 
 
 
 
 
 
New Zealand (b)
254

 
1

 
—

 
255

Total
493

 
1

 
(2
)
 
492

 
 
 
 
 
(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.



33


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)
2017
 
2016
Sales
 
 
 
Southern Timber

$32.7

 

$44.7

Pacific Northwest Timber
24.8

 
19.3

New Zealand Timber
40.7

 
36.0

Real Estate
 
 
 
Improved Development
—

 
1.7

Unimproved Development
—

 
0.9

Rural
6.7

 
3.7

Non-Strategic / Timberlands
5.6

 
7.1

Large Dispositions
42.0

 
—

Total Real Estate
54.3

 
13.4

Trading
34.0

 
21.4

Total Sales

$186.5

 

$134.8

 
 
 
 
Operating Income (Loss)
 
 
 
Southern Timber

$13.9

 

$15.8

Pacific Northwest Timber
(0.9
)
 
1.4

New Zealand Timber
10.3

 
4.7

Real Estate (a)
29.7

 
4.2

Trading
1.1

 
0.4

Corporate and other
(4.8
)

(3.5
)
Operating Income
49.3

 
23.0

Interest Expense, Interest Income and Other
(7.9
)

(8.7
)
Income Tax (Expense) Benefit
(6.3
)
 
0.8

Net Income
35.1

 
15.1

Less: Net income attributable to noncontrolling interest
1.3

 
0.6

Net Income Attributable to Rayonier Inc.

$33.8

 

$14.5

 
 
 
 
Adjusted EBITDA (b)
 
 
 
Southern Timber

$26.4

 

$32.4

Pacific Northwest Timber
9.3

 
6.0

New Zealand Timber
15.7

 
11.4

Real Estate
8.6

 
9.7

Trading
1.1

 
0.4

Corporate and Other
(4.0
)
 
(4.3
)
Total Adjusted EBITDA

$57.1

 

$55.6

 
 
 
 
 
(a)
The three months ended March 31, 2017 include $28.2 million from a Large Disposition.
(b)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators.



34


 
Three Months Ended
March 31,
Southern Timber Overview
2017
 
2016
Sales Volume (in thousands of tons)
 
 
 
Pine Pulpwood
823

 
1,181

Pine Sawtimber
505

 
528

Total Pine Volume
1,328

 
1,709

Hardwood
51

 
50

Total Volume
1,379

 
1,759

 
 
 
 
Percentage Delivered Sales
20
%
 
24
%
Percentage Stumpage Sales
80
%
 
76
%
 
 
 
 
Net Stumpage Pricing (dollars per ton)
 
 
 
Pine Pulpwood

$17.29

 

$18.90

Pine Sawtimber
26.42

 
26.90

Weighted Average Pine

$20.76

 

$21.38

Hardwood
10.95

 
12.47

Weighted Average Total

$20.40

 

$21.11

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$32.7

 

$44.7

Less: Cut and Haul
(4.6
)
 
(7.6
)
Net Stumpage Sales

$28.1

 

$37.1

 
 
 
 
Operating Income

$13.9

 

$15.8

(+) Depreciation, depletion and amortization
12.5

 
16.6

Adjusted EBITDA (a)

$26.4

 

$32.4

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

$5.7

 

$4.2

Period-End Acres (in thousands)
1,817

 
1,874

 
 
 
 
 
(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.










35


 
Three Months Ended
March 31,
Pacific Northwest Timber Overview
2017
 
2016
Sales Volume (in thousands of tons)
 
 
 
Pulpwood
89

 
90

Sawtimber
310

 
241

Total Volume
399

 
331

 
 
 
 
Sales Volume (converted to MBF)
 
 
 
Pulpwood
8,264

 
8,600

Sawtimber
39,458

 
30,378

Total Volume
47,722

 
38,978

 
 
 
 
Percentage Delivered Sales
80
%
 
87
%
Percentage Sawtimber Sales
78
%
 
73
%
 
 
 
 
Delivered Log Pricing (in dollars per ton)
 
 
 
Pulpwood

$38.71

 

$44.84

Sawtimber
74.88

 
67.95

Weighted Average Log Price

$66.06

 

$61.22

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$24.8

 

$19.3

Less: Cut and Haul
(10.3
)
 
(8.7
)
Net Stumpage Sales

$14.5

 

$10.6

 
 
 
 
Operating (Loss) Income

($0.9
)
 

$1.4

(+) Depreciation, depletion and amortization
10.2

 
4.6

Adjusted EBITDA (a)

$9.3

 

$6.0

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

$1.1

 

$0.8

Period-End Acres (in thousands)
378

 
373

Sawtimber (in dollars per MBF)

$609

 

$548

Estimated Percentage of Export Volume
25
%
 
26
%
 
 
 
 
 
(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.


36


 
Three Months Ended
March 31,
New Zealand Timber Overview
2017
 
2016
Sales Volume (in thousands of tons)
 
 
 
Domestic Sawtimber (Delivered)
196

 
186

Domestic Pulpwood (Delivered)
101

 
94

Export Sawtimber (Delivered)
180

 
186

Export Pulpwood (Delivered)
23

 
19

Total Volume
500

 
485

 
 
 
 
Delivered Log Pricing (in dollars per ton)
 
 
 
Domestic Sawtimber

$78.45

 

$66.64

Domestic Pulpwood

$34.70

 

$29.49

Export Sawtimber

$108.73

 

$94.34

 
 
 
 
Summary Financial Data (in millions of dollars)
 
 
 
Sales

$40.7

 

$34.2

Less: Cut and Haul
(16.0
)
 
(14.6
)
Less: Port and Freight Costs
(6.0
)
 
(5.3
)
Net Stumpage Sales

$18.7

 

$14.3

 
 
 
 
Land Sales
—

 
1.8

Total Sales

$40.7

 

$36.0

 
 
 
 
Operating Income

$10.3

 

$4.7

(+) Depreciation, depletion and amortization
5.4

 
4.9

(+) Non-cash cost of land sold
—

 
1.8

Adjusted EBITDA (a)

$15.7

 

$11.4

 
 
 
 
Other Data
 
 
 
Non-timber Income / Carbon credits ($ in MMs)

$0.1

 

$0.1

New Zealand Dollar to U.S. Dollar Exchange Rate (b)
0.7148

 
0.6646

Net Plantable Period-End Acres (in thousands)
298

 
299

Export Sawtimber (in dollars per JAS m3)

$126.38

 

$109.65

Domestic Sawtimber (in $NZD per tonne)

$120.74

 

$110.31

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


37


 
Three Months Ended
March 31,
Real Estate Overview
2017
 
2016
Sales (in millions of dollars)
 
 
 
Improved Development (a)
—



$1.7

Unimproved Development
—


0.9

Rural
6.7


3.7

Non-Strategic / Timberlands
5.6


7.1

Large Dispositions (b)
42.0

 
—

Total Sales

$54.3

 

$13.4

 
 
 
 
Acres Sold
 
 
 
Improved Development (a)
—

 
47

Unimproved Development
—

 
48

Rural
2,284

 
1,444

Non-Strategic / Timberlands
3,923

 
6,130

Large Dispositions (b)
24,954

 
—

Total Acres Sold
31,161

 
7,669

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

 

$37,353

Unimproved Development
—

 
18,000

Rural
2,950

 
2,548

Non-Strategic / Timberlands
1,427

 
1,155

Large Dispositions (b)
1,681

 
—

Weighted Average (Total) (c)

$1,988

 

$1,743

Weighted Average (Adjusted) (d)

$1,988

 

$1,525

 
 
 
 
Sales (Excluding Large Dispositions)

$12.3

 

$13.4

 
 
 
 
Operating Income

$29.7

 

$4.2

(+) Depreciation, depletion and amortization
2.6

 
3.2

(+) Non-cash cost of land and improved development
4.5

 
2.3

(–) Large Dispositions (b)
(28.2
)
 
—

Adjusted EBITDA (e)

$8.6

 

$9.7

 
 
 
 
 
(a)
Reflects land with capital invested in infrastructure improvements.
(b)
Large Dispositions are defined as transactions involving the sale of timberland that exceed $20 million in size and do not have any identified HBU premium relative to timberland value. In January 2017, the Company completed a disposition of approximately 25,000 acres located in Alabama for a sale price and gain of approximately $42.0 million and $28.2 million, respectively.
(c)
Excludes Large Dispositions.
(d)
Excludes Improved Development and Large Dispositions.
(e)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators below.


38


 
Three Months Ended
March 31,
Capital Expenditures By Segment (in millions of dollars)
2017
 
2016
Timber Capital Expenditures
 
 
 
Southern Timber
 
 
 
Reforestation, silviculture and other capital expenditures

$3.2

 

$3.1

Property taxes
2.6

 
1.9

Lease payments
1.8

 
2.0

Allocated overhead
1.0

 
1.0

Subtotal Southern Timber

$8.6

 

$8.0

Pacific Northwest Timber
 
 
 
Reforestation, silviculture and other capital expenditures
1.9

 
2.3

Property taxes
0.2

 
0.1

Allocated overhead
0.5

 
0.4

Subtotal Pacific Northwest Timber

$2.6

 

$2.8

New Zealand Timber
 
 
 
Reforestation, silviculture and other capital expenditures
1.4

 
1.3

Property taxes
0.2

 
0.1

Lease payments
0.6

 
0.4

Allocated overhead
0.7

 
0.6

Subtotal New Zealand Timber

$2.9

 

$2.4

Total Timber Segments Capital Expenditures

$14.1

 

$13.2

Real Estate
0.1

 
0.1

Corporate
0.2

 
—

Total Capital Expenditures

$14.4

 

$13.3

 
 
 
 
Timberland Acquisitions
 
 
 
Southern Timber

$0.5

 

$14.3

Pacific Northwest Timber
1.5

 
—

New Zealand Timber
9.3

 
—

Subtotal Timberland Acquisitions

$11.3

 

$14.3

 
 
 
 
Real Estate Development Investments

$2.2

 

$1.7

Rayonier Office Building

$2.6

 

$0.2



39



The following tables summarize sales, operating income and Adjusted EBITDA variances for March 31, 2017 versus March 31, 2016 (millions of dollars):
Sales
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Total
Three Months Ended March 31, 2016
 

$44.7

 

$19.3

 

$36.0

 

$13.4

 

$21.4

 

$134.8

Volume/Mix
 
(10.8
)
 
3.3

 
0.7

 
(2.6
)
 
8.9

 
(0.5
)
Price
 
(1.2
)
 
2.2

 
4.5

 
1.5

 
3.7

 
10.7

Foreign exchange (a)
 
—

 
—

 
1.3

 
—

 
—

 
1.3

Other (b)
 
—

 
—

 
(1.8
)
 
42.0

 
—

 
40.2

Three Months Ended March 31, 2017
 

$32.7

 

$24.8

 

$40.7

 

$54.3

 

$34.0

 

$186.5

 
 
 
 
 
(a)    Net of currency hedging impact.
(b)    Real Estate includes $42.0 million of sales from Large Dispositions.
Operating Income
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate and Other
 
Total
Three Months Ended March 31, 2016
 

$15.8

 

$1.4

 

$4.7

 

$4.2

 

$0.4

 

($3.5
)
 

$23.0

Volume/Mix
 
(4.4
)
 
0.8

 
0.2

 
(1.4
)
 
—

 
—

 
(4.8
)
Price
 
(1.0
)
 
1.7

 
4.2

 
1.5

 
—

 
—

 
6.4

Cost
 
1.4

 
(0.5
)
 
(0.3
)
 
(0.1
)
 
0.7

 
(1.3
)
 
(0.1
)
Non-timber income
 
1.5

 
0.3

 
(2.0
)
 
—

 
—

 
—

 
(0.2
)
Foreign exchange (a)
 
—

 
—

 
1.0

 
—

 
—

 
—

 
1.0

Depreciation, depletion & amortization
 
0.6

 
(4.6
)
 
0.1

 
(0.1
)
 
—

 
—

 
(4.0
)
Non-cash cost of land and improved development
 
—

 
—

 
2.0

 
(2.6
)
 
—

 
—

 
(0.6
)
Other (b)
 
—

 
—

 
0.4

 
28.2

 
—

 
—

 
28.6

Three Months Ended March 31, 2017
 

$13.9

 

($0.9
)
 

$10.3

 

$29.7

 

$1.1

 

($4.8
)
 

$49.3

 
 
 
 
 
(a)    Net of currency hedging impact.
(b)    Real Estate includes $28.2 million of operating income from Large Dispositions.
Adjusted EBITDA (a)
 
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate and Other
 
Total
Three Months Ended March 31, 2016
 

$32.4

 

$6.0

 

$11.4

 

$9.7

 

$0.4

 

($4.3
)
 

$55.6

Volume/Mix
 
(7.9
)
 
1.8

 
0.2

 
(2.5
)
 
—

 
—

 
(8.4
)
Price
 
(1.0
)
 
1.7

 
4.2

 
1.5

 
—

 
—

 
6.4

Cost
 
1.4

 
(0.5
)
 
(0.3
)
 
(0.1
)
 
0.7

 
0.3

 
1.5

Non-timber income
 
1.5

 
0.3

 
(2.0
)
 
—

 
—

 
—

 
(0.2
)
Foreign exchange (b)
 
—

 
—

 
1.7

 
—

 
—

 
—

 
1.7

Other (c)
 
—

 
—

 
0.5

 
—

 
—

 
—

 
0.5

Three Months Ended March 31, 2017
 

$26.4

 

$9.3

 

$15.7

 

$8.6

 

$1.1

 

($4.0
)
 

$57.1

 
 
 
 
 
(a)
Adjusted EBITDA is a non-GAAP measure defined and reconciled in Performance and Liquidity Indicators below.
(b)
Net of currency hedging impact.
(c)
New Zealand Timber includes $0.4 million from a settlement received in Q1 2017.

40


Southern Timber
First quarter sales of $32.7 million decreased $12.0 million, or 27%, versus the prior year period. Harvest volumes decreased 22% to 1.38 million tons versus 1.76 million tons in the prior year period. The decrease in harvest volumes is largely attributable to an extraordinarily strong first quarter last year in which stumpage customers harvested volume early in the year; however, weaker demand due to mill outages also contributed to lower volumes. Average pine sawtimber stumpage prices decreased 2% to $26.42 per ton versus $26.90 per ton in the prior year period, while average pine pulpwood stumpage prices decreased 9% to $17.29 per ton versus $18.90 per ton in the prior year period. The modest decrease in average sawtimber prices was driven by oversupply in the Gulf states, which was largely offset by increased export volume and pricing in the coastal Atlantic region. The decrease in average pulpwood prices was driven primarily by increased supply across all regions due to dry weather conditions and reduced demand in certain regions due to mill outages. Overall, weighted-average stumpage prices (including hardwood) decreased 3% to $20.40 per ton versus $21.11 per ton in the prior year period. Operating income of $13.9 million decreased $1.9 million versus the prior year period due to lower volumes ($4.4 million) and lower weighted-average stumpage prices ($1.0 million), which were partially offset by lower overhead and other costs ($1.4 million), higher non-timber income ($1.5 million) and lower depletion rates ($0.6 million). First quarter Adjusted EBITDA of $26.4 million was $6.0 million below the prior year period.
Pacific Northwest Timber
First quarter sales of $24.8 million increased $5.5 million, or 28%, versus the prior year period. Harvest volumes increased 21% to 399,000 tons versus 331,000 tons in the prior year period due to additional volume from our Menasha acquisition. Average delivered sawtimber prices increased 10% to $74.88 per ton versus $67.95 per ton in the prior year period, while average delivered pulpwood prices decreased 14% to $38.71 per ton versus $44.84 per ton in the prior year period. The increase in average sawtimber prices was due to stronger export and domestic sawtimber markets as well as an increased mix of higher-value Douglas-fir. The decrease in average pulpwood prices was due to an increase in wood chip residuals from lumber mills, which in turn reduced the demand for pulpwood logs. Operating loss of $0.9 million versus operating income of $1.4 million in the prior year period was primarily due to higher depletion rates resulting from our Menasha acquisition ($4.6 million) and higher overhead and road maintenance costs ($0.5 million), which were partially offset by higher prices ($1.7 million), higher volumes ($0.8 million) and higher non-timber income ($0.3 million). First quarter Adjusted EBITDA of $9.3 million was $3.3 million above the prior year period.
New Zealand Timber
First quarter sales of $40.7 million increased $4.7 million, or 13%, versus the prior year period (which included a land sale of $1.8 million). Harvest volumes increased 3% to 500,000 tons versus 485,000 tons in the prior year period. Average delivered prices for export sawtimber increased 15% to $108.73 per ton versus $94.34 per ton in the prior year period, while average delivered prices for domestic sawtimber increased 18% to $78.45 per ton versus $66.64 per ton in the prior year period. The increase in export sawtimber prices was primarily due to stronger demand from China. The increase in domestic sawtimber prices (in U.S. dollar terms) was driven by strong demand for construction materials and the rise in the NZ$/US$ exchange rate (US$0.71 per NZ$1.00 versus US$0.66 per NZ$1.00). Excluding the impact of foreign exchange rates, domestic sawtimber prices increased 9% from the prior year period. Operating income of $10.3 million increased $5.6 million versus the prior year period due to higher prices ($4.2 million), favorable foreign exchange impacts ($1.0 million), higher other income ($0.4 million), higher volumes ($0.2 million) and lower depletion rates ($0.1 million), which were partially offset by higher overhead costs ($0.3 million). First quarter Adjusted EBITDA of $15.7 million was $4.3 million above the prior year period.
Real Estate
First quarter sales of $54.3 million increased $40.9 million versus the prior year period, while operating income of $29.7 million increased $25.5 million versus the prior year period. The first quarter sales and operating income included $42.0 million and $28.2 million, respectively, from Large Dispositions. Sales and operating income increased in the first quarter due to higher volumes (31,161 acres sold versus 7,669 acres sold in the prior year period). First quarter Adjusted EBITDA of $8.6 million was $1.1 million below the prior year period.
Rural sales of $6.7 million were comprised of 2,284 acres at an average price of $2,950 per acre, including 1,844 acres in Texas for an average price of $2,967 per acre. Non-strategic / Timberland sales of $5.6 million were comprised of 3,923 acres in Alabama at an average price of $1,427 per acre. Large Dispositions of $42.0 million were comprised of the previously announced disposition of 24,954 acres in Alabama at an average price of $1,681 per acre.

41


Trading
First quarter sales of $34.0 million increased $12.6 million versus the prior year period due to higher volumes and prices. Sales volumes increased 41% to 322,000 tons versus 228,000 tons in the prior year period due to increased volume from existing suppliers and stumpage blocks purchased from third-parties, coupled with improving export market demand. Average prices increased 12% to $105.43 per ton versus $94.09 per ton in the prior year period primarily due to stronger demand from China. Operating income of $1.1 million increased $0.7 million versus the prior year period.
Other Items
Corporate and Other Expense/Eliminations
First quarter corporate and other operating expenses of $4.8 million increased $1.3 million versus the prior year period due to higher costs related to shareholder litigation ($0.3 million) and the prior year first quarter gain on foreign currency derivatives ($1.2 million), which were partially offset by lower selling, general and administrative expenses ($0.2 million) due to cost reduction initiatives and changes made to our pension plan in the fourth quarter of 2016. Costs related to shareholder litigation include expenses incurred as a result of the securities litigation and the shareholder derivative demands. See Note 8 — Contingencies. In addition, these costs include the costs associated with the Company’s response to a subpoena it received from the SEC in November 2014. In July 2016, the Division of Enforcement of the SEC notified the Company that it had concluded its investigation into the Company.
Interest Expense
First quarter interest expense of $8.4 million increased $1.3 million versus the prior year period due to higher outstanding debt, partially offset by lower average rates.
Income Tax (Expense) Benefit
First quarter income tax expense of $6.3 million increased $7.1 million versus the prior year period. The income tax expense is principally related to the New Zealand JV.
Outlook
We are on track to achieve our full-year Adjusted EBITDA guidance. We recently closed on previously-announced acquisitions totaling approximately 95,100 acres in coastal Florida, Georgia and South Carolina. The acquisitions represent an upgrade of our U.S. South portfolio, as they are comprised of well-stocked, highly productive properties in some of the strongest markets in the U.S. South. We believe these acquisitions further position us to benefit from the ongoing U.S. housing recovery as well as the potential increase in U.S. lumber production that is expected to result from the recently announced duties on Canadian lumber imports. In the Pacific Northwest Timber segment, we expect a modest improvement in sawtimber prices as domestic mills increase production and as exporters compete for log supply in the region. In our New Zealand Timber segment, we expect strong performance driven by sustained levels of demand in both domestic and export markets. In our Real Estate segment, we continue to see solid demand for our Rural properties and remain optimistic about the long-term prospects for our Wildlight development project, which we expect will generate its first sales in 2017.



42



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 or asset dispositions.
Summary of Liquidity and Financing Commitments
 
March 31,
 
December 31,
(millions of dollars)
2017
 
2016
Cash and cash equivalents

$219.4

 

$85.9

Total debt (a)
1,074.4

 
1,065.5

Shareholders’ equity
1,647.3

 
1,496.9

Total capitalization (total debt plus equity)
2,721.7

 
2,562.4

Debt to capital ratio
39
%
 
42
%
Net debt to enterprise value (b)
19
%
 
23
%
 
 
 
 
 
(a)
Total debt as of March 31, 2017 includes $42.9 million of short-term borrowings in addition to $1,031.5 million of long-term borrowings, gross of $3.4 million of deferred financing costs.
(b)
Enterprise value is calculated as the number of shares outstanding multiplied by the Company’s share price plus net debt as of March 31, 2017 and December 31, 2016.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for the three months ended March 31, 2016 and 2015.
(millions of dollars)
2017
 
2016
Cash provided by (used for):
 
 
 
Operating activities

$33.9

 

$31.0

Investing activities
(33.6
)
 
(20.3
)
Financing activities
133.2

 
13.4

Cash Provided by Operating Activities
Cash provided by operating activities increased $2.9 million primarily due to higher operating results.
Cash Used for Investing Activities
Cash used for investing activities increased $13.3 million compared to 2016 primarily due to an increase in change in restricted cash of $50.2 million, an increase in capital expenditures of $1.1 million, an increase in real estate development investments of $0.5 million, an increase in spending on the construction of the Company’s office building of $2.4 million, and a deposit on timberland acquisition of $6.5 million. These amounts were partially offset by a decrease in timberland acquisitions of $3.0 million and net proceeds from a Large Disposition of $42.0 million.
Cash Provided by Financing Activities
Cash provided by financing activities increased $119.7 million from the prior year period due to an increase in equity issuances of $154.6 million, a decrease in common shares repurchases of $0.7 million and a decrease in dividends paid of $0.1 million. These amounts were partially offset by a decrease in net debt issuances of $35.6 million.

43


Expected 2017 Expenditures
Capital expenditures in 2017 are expected to be between $64 and $68 million, excluding capital expenditures related to the office building and any strategic timberland acquisitions we may make. Capital expenditures are expected to be comprised primarily 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 in 2017 are expected to be between $15 and $20 million. Expected real estate development investments are primarily related to Wildlight, our mixed-use community development project located north of Jacksonville at the interchange of I-95 and State Road A1A.
We are currently constructing a new headquarters building located in the Wildlight development project. The new office will allow us to consolidate three existing leased offices in Jacksonville and Fernandina Beach, Florida into one location and also serve as a catalyst for the Wildlight project. Construction costs of this building incurred in 2017 are expected to be approximately $6 million.
Our 2017 dividend payments are expected to be approximately $127 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 contribution requirements in 2017 but may make discretionary contributions in the future. On an ongoing basis, cash income tax payments are expected to be minimal.

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 uses CAD as a liquidity measure. CAD is a non-GAAP measure that management uses to measure 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 timberland acquisitions and spending on the Company’s office building) and working capital and other balance sheet changes. CAD is not necessarily indicative of the CAD that may be generated in future periods.
Management uses Adjusted EBITDA as a performance measure. Adjusted EBITDA is a non-GAAP measure that management uses to make strategic decisions about the business and that investors can use to evaluate the operational performance of the assets under management. It removes the impact of specific items that management believes do not directly reflect the core business operations on an ongoing basis. 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, the gain on foreign currency derivatives and Large Dispositions. Costs related to shareholder litigation include expenses incurred as a result of the securities litigation and the shareholder derivative demands. See Note 8—Contingencies. In addition, these costs include the costs associated with the Company’s response to a subpoena it received from the SEC in November 2014. In July 2016, the Division of Enforcement of the SEC notified the Company that it had concluded its investigation into the Company.

44


We reconcile Adjusted EBITDA to Net Income for the consolidated Company and to Operating Income for the Segments, as those are the most comparable GAAP measures for each. The following table provides a reconciliation of Net Income to Adjusted EBITDA for the respective periods (in millions of dollars):
 
Three Months Ended
March 31,
 
2017
 
2016
Net Income to Adjusted EBITDA Reconciliation
 
 
 
Net income

$35.1

 

$15.1

Interest, net
7.9

 
8.7

Income tax expense (benefit)
6.3

 
(0.8
)
Depreciation, depletion and amortization
30.8

 
29.3

Non-cash cost of land and improved development
4.5

 
4.1

Costs related to shareholder litigation (a)
0.7

 
0.4

Gain on foreign currency derivatives (b)
—

 
(1.2
)
Large Dispositions (c)
(28.2
)
 
—

Adjusted EBITDA

$57.1

 

$55.6

 
 
 
 
 
(a)
Costs related to shareholder litigation include expenses incurred as a result of the securities litigation and the shareholder derivative demands. See Note 8—Contingencies. In addition, these costs include the costs associated with the Company’s response to a subpoena it received from the SEC in November 2014. In July 2016, the Division of Enforcement of the SEC notified the Company that it had concluded its investigation into the Company.
(b)
Gain on foreign currency derivatives is the gain resulting from the foreign exchange derivatives the Company used to mitigate the risk of fluctuations in foreign exchange rates while awaiting the capital contribution to the New Zealand JV.
(c)
Large Dispositions are defined as transactions involving the sale of timberland that exceed $20 million in size and do not have any identified HBU premium relative to timberland value. In January 2017, the Company completed a disposition of approximately 25,000 acres located in Alabama for a sale price and gain of approximately $42.0 million and $28.2 million, respectively.
The following tables provide a reconciliation of Operating Income (Loss) by segment to Adjusted EBITDA by segment for the respective periods (in millions of dollars):
Three Months Ended
Southern Timber
 
Pacific Northwest Timber
 
New Zealand Timber
 
Real Estate
 
Trading
 
Corporate
and
other
 
Total
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)

$13.9

 

($0.9
)
 

$10.3

 

$29.7

 

$1.1

 

($4.8
)
 

$49.3

Depreciation, depletion and amortization
12.5

 
10.2

 
5.4

 
2.6

 
—

 
0.1

 
30.8

Non-cash cost of land and improved development
—

 
—

 
—

 
4.5

 
—

 
—

 
4.5

Costs related to shareholder litigation (a)
—

 
—

 
—

 
—

 
—

 
0.7

 
0.7

Large Dispositions (b)
—

 
—

 
—

 
(28.2
)
 
—

 
—

 
(28.2
)
Adjusted EBITDA

$26.4

 

$9.3

 

$15.7

 

$8.6

 

$1.1

 

($4.0
)
 

$57.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income

$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 (c)
—

 
—

 
—

 
—

 
—

 
(1.2
)
 
(1.2
)
Adjusted EBITDA

$32.4

 

$6.0

 

$11.4

 

$9.7

 

$0.4

 

($4.3
)
 

$55.6

 
 
 
 
 
(a)
Costs related to shareholder litigation include expenses incurred as a result of the securities litigation and the shareholder derivative demands. See Note 8—Contingencies. In addition, these costs include the costs associated with the Company’s response to a subpoena it received from the SEC in November 2014. In July 2016, the Division of Enforcement of the SEC notified the Company that it had concluded its investigation into the Company.

45


(b)
Large Dispositions are defined as transactions involving the sale of timberland that exceed $20 million in size and do not have any identified HBU premium relative to timberland value. In January 2017, the Company completed a disposition of approximately 25,000 acres located in Alabama for a sale price and gain of approximately $42.0 million and $28.2 million, respectively.
(c)
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 capital contribution to the New Zealand JV.
The following table provides a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):
 
Three Months Ended March 31,
 
2017
 
2016
Cash provided by operating activities

$33.9

 

$31.0

Capital expenditures (a)
(14.4
)
 
(13.3
)
Working capital and other balance sheet changes
19.3

 
18.7

CAD
38.8

 
36.4

Mandatory debt repayments
—

 
—

CAD after mandatory debt repayments

$38.8

 

$36.4

Cash used for investing activities

($33.6
)
 

($20.3
)
Cash provided by (used for) financing activities

$133.2

 

$13.4

 
 
 
 
 
(a)
Capital expenditures exclude timberland acquisitions of $11.3 million and $14.3 million and spending on the Rayonier office building of $2.6 million and $0.2 million during the three months ended March 31, 2017 and March 31, 2016, respectively.
Liquidity Facilities
2017 Debt Activity
During the three months ended March 31, 2017, the Company made additional borrowings of $15.0 million on the Revolving Credit Facility. Proceeds from the additional borrowings were used to repay the $15.0 million solid waste bonds that were due in 2020. As of March 31, 2017, the Company had available borrowings of $154.6 million under the Revolving Credit Facility, net of $5.4 million to secure its outstanding letters of credit.
In addition, the New Zealand JV made $11.3 million of borrowings, net of repayments and changes in exchange rates, on the New Zealand JV Working Capital Facility. As of March 31, 2017, draws totaling NZ$23.8 million remain available on the working capital facilities. The New Zealand JV also paid $2.5 million of its shareholder loan held with the non-controlling interest party during the three months ended March 31, 2017. Changes in exchange rates increased debt on a U.S. dollar basis for its shareholder loan by $0.2 million.

Off-Balance Sheet Arrangements
We utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default on critical obligations, and collateral for certain self-insurance programs that we maintain. These arrangements consist of standby letters of credit and surety bonds. As part of our ongoing operations, we also periodically issue guarantees to third parties. Off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts. See Note 9 — Guarantees for details on the letters of credit, surety bonds and guarantees as of March 31, 2017.


46


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, 2017 and anticipated cash spending by period: 
Contractual Financial Obligations (in millions)
Total
 
Payments Due by Period
Remaining 2017
 
2018-2019
 
2020-2021
 
Thereafter
Long-term debt (a)

$1,031

 
—

 
—

 

$40

 

$991

Current maturities of long-term debt (b)
43

 
43

 
—

 
—

 
—

Interest payments on long-term debt (c)
201

 
23

 
60

 
58

 
60

Operating leases — timberland
194

 
7

 
18

 
17

 
152

Operating leases — PP&E, offices
5

 
1

 
2

 
1

 
1

Commitments — derivatives (d)
56

 
6

 
14

 
14

 
22

Commitments — other (e)
3

 
3

 
—

 
—

 
—

Total contractual cash obligations

$1,533

 

$83

 

$94

 

$130

 

$1,226

 
 
 
 
 
(a)
The book value of long-term debt, net of deferred financing costs, is currently recorded at $1,028.1 million on the Company’s Consolidated Balance Sheet, but upon maturity the liability will be $1,031.5 million.
(b)
The book value of our current maturities of long-term debt is currently recorded at $42.9 million on the Company’s Consolidated Balance Sheet, but upon maturity the liability will be $42.8 million.
(c)
Projected interest payments for variable rate debt were calculated based on outstanding principal amounts and interest rates as of March 31, 2017.
(d)
Commitments represent payments expected to be made on derivative financial instruments (foreign exchange contracts and interest rate swaps). See Note 11 — Derivative Financial Instruments and Hedging Activities.
(e)
Commitments include payments expected to be made on the construction of the Company’s office building.

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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, 2017 we had $690 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, 2017 was $650 million. The Term Credit Agreement and associated interest rate swaps mature in August 2024 and the Incremental Term Loan agreement and associated interest rate swaps mature in May 2026. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in a corresponding increase/decrease of approximately $0.4 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, 2017 was $325.2 million compared to the $325 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, 2017 would result in a corresponding decrease/increase in the fair value of our long-term fixed-rate debt of approximately $15 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 payments, 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, 2017, the New Zealand JV had foreign currency exchange contracts with a notional amount of $61 million and foreign currency option contracts with a notional amount of $81 million outstanding. The amount hedged represents 54% of forecast U.S. dollar denominated harvesting sales proceeds over the next 18 months and 69% 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, 2017.
In the quarter ended March 31, 2017, 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.


48


PART II.    OTHER INFORMATION

Item 1.
Legal Proceedings

The information set forth in Note 8—Contingencies in the “Notes to 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 and the Board of Director’s discretion. The program has no time limit and may be suspended or discontinued at any time. There were no shares repurchased under this program in the first quarter of 2017 and there was $99.3 million, or approximately 3,504,249 shares based on the period end closing stock price of $28.34, available for repurchase as of March 31, 2017.
In 1996, we began a Common Share repurchase program (the “1996 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. The 1996 anti-dilutive program does not have an expiration date. There were no shares purchased under this program in the first quarter of 2017 and there were 3,778,625 shares available for purchase at March 31, 2017.
The following table provides information regarding our purchases of Rayonier common stock during the quarter ended March 31, 2017:
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
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (b)
January 1 to January 31
 
—

 
—

 
—

 
7,282,874

February 1 to February 28
 
—

 
—

 
—

 
7,282,874

March 1 to March 31
 
298

 

$28.34

 
—

 
7,282,874

Total
 
298

 
 
 
—

 


 
 
 
 
 
(a)
Includes 298 shares of the Company’s common stock purchased in March from a former employee in a non-open market transaction. The shares of stock were sold by the former employee of the Company in exchange for cash that was used to pay withholding taxes associated with the vesting of a restricted stock award 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 vesting date of the award.
(b)
Maximum number of shares authorized to be purchased as of March 31, 2017 include 3,778,625 under the 1996 anti-dilutive program and approximately 3,504,249 under the share repurchase program.


49



Item 6.
Exhibits
10.1

Amendment to Rayonier Investment and Savings Plan for Salaried Employees effective January 1, 2017*
Filed herewith
10.2

2017 Performance Share Annual Award Program*
Filed herewith
10.3

Rayonier Annual Bonus Program, as amended and restated*
Filed herewith
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, 2017, formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016; (ii) the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (iii) the Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 31, 2017 and the Years Ended December 31, 2016 and 2015; (iv) the Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016; and (v) the Notes to Consolidated Financial Statements

Filed herewith
                    
* Management contract or compensatory plan.


50


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/ APRIL TICE
 
 
April Tice
Director, Financial Services and Corporate Controller
(Duly Authorized Officer, Principal Accounting Officer)
Date: May 5, 2017





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