RYN 10-Q Quarterly Report June 30, 2013 | Alphaminr
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RYN 10-Q Quarter ended June 30, 2013

Balance Sheet
Cash Flow
Income Statement
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RAYONIER INC
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10-Q 1 rayonier201310q2q2013.htm FORM 10-Q Rayonier 2013 10Q 2Q2013

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 June 30, 2013
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
1301 RIVERPLACE BOULEVARD
JACKSONVILLE, FL 32207
(Principal Executive Office)
Telephone Number: (904) 357-9100

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

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

As of July 18, 2013 , there were outstanding 126,119,760 C ommon Shares of the registrant.


















TABLE OF CONTENTS

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 June 30,
Six Months Ended
June 30,
2013
2012
2013
2012
SALES
$
409,077

$
348,096

$
802,796

$
684,667

Costs and Expenses
Cost of sales
297,698

243,571

563,716

479,279

Selling and general expenses
16,929

15,892

33,028

35,157

Other operating expense (income), net
291

(5,295
)
(3,212
)
(6,433
)
314,918

254,168

593,532

508,003

Equity in income of New Zealand joint venture
304

170

562

184

OPERATING INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
94,463

94,098

209,826

176,848

Gain related to consolidation of New Zealand joint venture (Note 6)
16,098

—

16,098

—

OPERATING INCOME
110,561

94,098

225,924

176,848

Interest expense
(10,019
)
(16,056
)
(17,736
)
(27,880
)
Interest and miscellaneous income, net
2,598

84

2,656

60

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
103,140

78,126

210,844

149,028

Income tax expense
(15,249
)
(12,035
)
(19,695
)
(30,338
)
INCOME FROM CONTINUING OPERATIONS
87,891

66,091

191,149

118,690

DISCONTINUED OPERATIONS, NET (Note 2)
Income from discontinued operations, net of income tax expense of $0, $1,505, $22,273 and $1,927
—

2,988

44,477

3,825

NET INCOME
87,891

69,079

235,626

122,515

Net income attributable to noncontrolling interest
727

—

727

—

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
87,164

69,079

234,899

122,515

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation adjustment
(28,201
)
(8,081
)
(27,226
)
(2,255
)
New Zealand joint venture cash flow hedges
222

(1,998
)
775

(793
)
Amortization of pension and postretirement plans, net of income tax expense of $1,620, $1,482, $3,824 and $2,850
3,717

3,401

8,687

6,541

Total other comprehensive (loss) income
(24,262
)
(6,678
)
(17,764
)
3,493

COMPREHENSIVE INCOME
63,629

62,401

217,862

126,008

Comprehensive loss attributable to noncontrolling interest
(9,505
)
—

(9,505
)
—

COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
73,134

$
62,401

$
227,367

$
126,008

EARNINGS PER COMMON SHARE (Note 3)
BASIC EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
Continuing Operations
$
0.69

$
0.54

$
1.52

$
0.97

Discontinued Operations
—

0.02

0.36

0.03

Net Income
$
0.69

$
0.56

$
1.88

$
1.00

DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO RAYONIER INC.
Continuing Operations
$
0.67

$
0.52

$
1.46

$
0.93

Discontinued Operations
—

0.02

0.34

0.03

Net Income
$
0.67

$
0.54

$
1.80

$
0.96


See Notes to Consolidated Financial Statements.

1


RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
June 30, 2013
December 31, 2012
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
343,581

$
280,596

Accounts receivable, less allowance for doubtful accounts of $685 and $417
116,538

100,359

Inventory
Finished goods
79,121

103,568

Work in progress
3,047

4,446

Raw materials
14,620

17,602

Manufacturing and maintenance supplies
2,303

2,350

Total inventory
99,091

127,966

Deferred tax assets
55,563

15,845

Prepaid and other current assets
67,444

41,508

Total current assets
682,217

566,274

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
2,080,611

1,573,309

PROPERTY, PLANT AND EQUIPMENT
Land
22,996

27,383

Buildings
166,578

147,445

Machinery and equipment
1,644,945

1,444,012

Construction in progress
123,621

268,459

Total property, plant and equipment, gross
1,958,140

1,887,299

Less — accumulated depreciation
(1,105,708
)
(1,180,261
)
Total property, plant and equipment, net
852,432

707,038

INVESTMENT IN JOINT VENTURE (Note 6)
—

72,419

OTHER ASSETS
212,791

203,911

TOTAL ASSETS
$
3,828,051

$
3,122,951

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
133,255

$
70,381

Current maturities of long-term debt
75,463

150,000

Accrued taxes
20,158

13,824

Accrued payroll and benefits
20,489

28,068

Accrued interest
9,835

7,956

Accrued customer incentives
10,743

10,849

Other current liabilities
51,842

18,640

Current liabilities for dispositions and discontinued operations (Note 13)
8,686

8,105

Total current liabilities
330,471

307,823

LONG-TERM DEBT
1,591,834

1,120,052

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS (Note 13)
69,442

73,590

PENSION AND OTHER POSTRETIREMENT BENEFITS (Note 15)
158,594

159,582

OTHER NON-CURRENT LIABILITIES
27,590

23,900

COMMITMENTS AND CONTINGENCIES (Notes 11, 12 and 14)


SHAREHOLDERS’ EQUITY
Common Shares, 480,000,000 shares authorized, 126,119,760 and 123,332,444 shares issued and outstanding
679,803

670,749

Retained earnings
1,000,647

876,634

Accumulated other comprehensive loss
(116,911
)
(109,379
)
TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,563,539

1,438,004

Noncontrolling interest
86,581

—

TOTAL SHAREHOLDERS’ EQUITY
1,650,120

1,438,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
3,828,051

$
3,122,951


See Notes to Consolidated Financial Statements.

2


RAYONIER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended June 30,
2013
2012
OPERATING ACTIVITIES
Net income
$
235,626

$
122,515

Adjustments to reconcile net income to cash provided by operating activities:
Depreciation, depletion and amortization
79,659

64,592

Non-cash cost of real estate sold
2,593

2,401

Stock-based incentive compensation expense
6,226

9,460

Amortization of debt discount/premium
837

3,863

Deferred income taxes
38,107

(15,044
)
Tax benefit of AFMC for CBPC exchange
(18,761
)
—

Amortization of losses from pension and postretirement plans
11,617

9,391

Gain on sale of discontinued operations, net
(42,670
)
—

Gain related to consolidation of New Zealand joint venture
(16,098
)
—

Other
(8,936
)
(586
)
Changes in operating assets and liabilities:
Receivables
(11,782
)
(13,773
)
Inventories
27,325

7,096

Accounts payable
19,535

(9,518
)
Income tax receivable/payable
(5,626
)
31,758

All other operating activities
(7,654
)
1,524

Payment to exchange AFMC for CBPC
(70,311
)
—

Expenditures for dispositions and discontinued operations
(4,015
)
(4,803
)
CASH PROVIDED BY OPERATING ACTIVITIES
235,672

208,876

INVESTING ACTIVITIES
Capital expenditures
(94,126
)
(76,246
)
Purchase of additional interest in New Zealand joint venture
(139,879
)
—

Purchase of timberlands
(10,447
)
(8,687
)
Jesup mill cellulose specialties expansion (gross purchases of $114,449 and $72,662, net of purchases on account of $14,264 and $8,664)
(100,185
)
(63,998
)
Proceeds from disposition of Wood Products business, net of income tax payments of $11,137
72,953

—

Change in restricted cash
7,603

(14,427
)
Other
20,076

(704
)
CASH USED FOR INVESTING ACTIVITIES
(244,005
)
(164,062
)
FINANCING ACTIVITIES
Issuance of debt
455,000

355,000

Repayment of debt
(273,087
)
(188,110
)
Dividends paid
(113,222
)
(98,201
)
Proceeds from the issuance of common shares
6,643

3,980

Excess tax benefits on stock-based compensation
7,399

4,234

Debt issuance costs
—

(3,653
)
Repurchase of common shares
(11,241
)
(7,783
)
CASH PROVIDED BY FINANCING ACTIVITIES
71,492

65,467

EFFECT OF EXCHANGE RATE CHANGES ON CASH
(174
)
219

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
62,985

110,500

Balance, beginning of year
280,596

78,603

Balance, end of period
$
343,581

$
189,103

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period:
Interest
$
16,754

$
10,936

Income taxes
$
84,508

$
10,989

Non-cash investing activity:
Capital assets purchased on account
$
59,729

$
30,175

Non-cash financing activity:
Shareholder debt assumed in acquisition of New Zealand joint venture
$
125,532

$
—

Conversion of shareholder debt to equity noncontrolling interest
$
(95,961
)
$
—


See Notes to Consolidated Financial Statements.

3


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


1.
BASIS OF PRESENTATION
Basis of Presentation
The unaudited consolidated financial statements and notes thereto of Rayonier Inc. and its subsidiaries (“Rayonier” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“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, 2012 , as filed with the SEC.
Reclassifications
Certain 2012 amounts have been reclassified to agree with the current year presentation. See Note 2 — Sale of Wood Products Business for information regarding reclassifications for discontinued operations.
New Accounting Standards
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires enhanced disclosures about assets and liabilities that are subject to a master netting agreement or when the right of offset exists. In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This pronouncement limits the scope of ASU No. 2011-1. The standards’ disclosure requirements are retrospective and were effective beginning in first quarter 2013. See Note 9 — Derivative Financial Instruments and Hedging Activities for the disclosures required under this guidance.
In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . This standard requires reporting, in one place, information about reclassifications out of AOCI by component. An entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount is reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified to net income in their entirety, an entity is required to cross-reference to other currently required disclosures that provide additional detail about those amounts. The information required by this standard must be presented in one place, either parenthetically on the face of the financial statements by income statement line item or in a note. See Note 17 — Accumulated Other Comprehensive Loss for the disclosures required under this guidance.
In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This standard requires a parent entity to release a related foreign entity’s cumulative translation adjustment into net income only if its sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The cumulative translation adjustment should be released into net income if the transaction results in the loss of a controlling financial interest in a foreign entity or results in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date. ASU No. 2013-05 will be effective for first quarter 2014. The Company does not expect that the adoption of this standard will have a material impact on the consolidated financial statements.
Subsequent Events
The Company evaluated events and transactions that occurred after the balance sheet date but before financial statements were issued , and two subsequent events were identified that warranted disclosure. On July 19, 2013 , the Board of Directors approved an increase in the quarterly dividend per share from $0.44 per share to $0.49 per share effective for the third quarter 2013 distribution. Additionally, the New Zealand JV negotiated an amendment to its debt facility, as discussed in Note 16 — Debt .


4

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

2.
SALE OF WOOD PRODUCTS BUSINESS
On March 1, 2013, Rayonier completed the sale of its Wood Products business (consisting of three lumber mills in Baxley, Swainsboro and Eatonton, Georgia) to International Forest Products Limited (“Interfor”) for $80 million plus a working capital adjustment . The sale is consistent with the Company’s strategic plan to fully position its manufacturing operations in the specialty chemicals sector. Rayonier will not have significant continuing involvement in the operations of the Wood Products business. Accordingly, the operating results of the Wood Products business, formerly reported as a separate operating segment , are classified as discontinued operations in the Company’s Consolidated Statements of Income and Comprehensive Income for all periods presented. Certain administrative and general costs historically allocated to the Wood Products segment, which will remain with the Company after the sale, are reported in continuing operations.

Rayonier recognized an after-tax gain of $42.7 million on the sale. The gain is included in “Income from discontinued operations, net” on the Consolidated Statements of Income and Comprehensive Income for the six months ended June 30, 2013 .

The following table summarizes the operating results of the Company’s discontinued operations and the related gain for the three and six months ended June 30, 2013 and 2012, as presented in “Income from discontinued operations, net” in the Consolidated Statements of Income and Comprehensive Income:
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Sales
$
—

$
23,830

$
16,968

$
43,039

Cost of sales and other
—

(19,337
)
(14,258
)
(37,287
)
Gain on sale of discontinued operations
—

—

64,040

—

Income from discontinued operations before income taxes
—

4,493

66,750

5,752

Income tax expense
—

(1,505
)
(22,273
)
(1,927
)
Income from discontinued operations, net
$
—

$
2,988

$
44,477

$
3,825


The sale did not meet the “held for sale” criteria prior to the period it was completed. The major classes of Wood Products assets and liabilities included in the sale were as follows:
March 1, 2013
Accounts receivable, net
$
4,127

Inventory
4,270

Prepaid and other current assets
2,053

Property, plant and equipment, net
9,990

Total assets
$
20,440

Total liabilities
$
596


Cash flows from discontinued operations are immaterial both individually and in the aggregate. As such, they are included with cash flows from continuing operations in the Consolidated Statements of Cash Flows.
Pursuant to the purchase and sale agreement, Rayonier will provide Interfor with saw timber procurement services for the three lumber mills through December 31, 2013. Rayonier also contracted with Interfor to purchase wood chips produced at the lumber mills for use at Rayonier’s Jesup mill and market other wood chips produced by the mills to third parties on Interfor’s behalf. The Company will purchase 100 percent of the Baxley mill chips for five years and 25 percent of the Swainsboro mill chips through 2013. The purchase price of these chips will be based on the average price paid by the Company to unrelated third parties.

5

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

Prior to the Wood Products sale, saw timber procurement services for and wood chip purchases from the lumber mills were intercompany transactions eliminated in consolidation as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Wood chip purchases
$
—

$
3,003

$
1,650

$
6,237

Saw timber procurement services
—

287

223

574

Total intercompany
$
—

$
3,290

$
1,873

$
6,811


3.
EARNINGS PER COMMON SHARE
The following table provides details of the calculations of basic and diluted earnings per common share:
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Income from continuing operations
$
87,891

$
66,091

$
191,149

$
118,690

Income from continuing operations attributable to noncontrolling interest
727

—

727

—

Income from continuing operations attributable to Rayonier Inc.
$
87,164

$
66,091

$
190,422

$
118,690

Income from discontinued operations attributable to Rayonier Inc.
$
—

$
2,988

$
44,477

$
3,825

Net income attributable to Rayonier Inc.
$
87,164

$
69,079

$
234,899

$
122,515

Shares used for determining basic earnings per common share
126,027,297

122,455,464

125,257,876

122,403,388

Dilutive effect of:
Stock options
504,321

669,298

519,014

692,622

Performance and restricted shares
386,228

726,368

384,910

727,968

Assumed conversion of Senior Exchangeable Notes (a)
2,217,058

2,669,808

2,173,658

2,830,382

Assumed conversion of warrants (a) (b)
1,632,345

890,189

2,250,361

1,077,217

Shares used for determining diluted earnings per common share
130,767,249

127,411,127

130,585,819

127,731,577

Basic earnings per common share attributable to Rayonier Inc.:
Continuing operations
$
0.69

$
0.54

$
1.52

$
0.97

Discontinued operations
—

0.02

0.36

0.03

Net income
$
0.69

$
0.56

$
1.88

$
1.00

Diluted earnings per common share attributable to Rayonier Inc.:
Continuing operations
$
0.67

$
0.52

$
1.46

$
0.93

Discontinued operations
—

0.02

0.34

0.03

Net income
$
0.67

$
0.54

$
1.80

$
0.96


6

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

Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Anti-dilutive shares excluded from the computations of diluted earnings per share:
Stock options, performance and restricted shares
199,245

318,666

207,097

326,777

Assumed conversion of exchangeable note hedges (a)
2,217,058

2,669,808

2,173,658

2,830,382

Total
2,416,303

2,988,474

2,380,755

3,157,159

(a) The Senior Exchangeable Notes due 2012 (the “2012 Notes”) matured in October 2012; however, no additional shares were issued due to offsetting exchangeable note hedges. Similarly, Rayonier will not issue additional shares upon maturity of the Senior Exchangeable Notes due 2015 (the “2015 Notes”) due to offsetting hedges. Accounting Standards Codification 260, Earnings Per Share requires the assumed conversion of the Notes to be included in dilutive shares if the average stock price for the period exceeds the strike prices, while the assumed conversion of the hedges is excluded since they are anti-dilutive. As such, the dilutive effect of the assumed conversion of the 2012 Notes was only included for the three and six months ended June 30, 2012, while the effect of the 2015 Notes was included for all periods presented.
The warrants sold in conjunction with the 2012 Notes began maturing on January 15, 2013 and matured ratably through March 27, 2013 . As a result, 2,037,303 shares were issued through the end of the first quarter and 97,918 shares were issued in the first week of April. The dilutive impact of these warrants was calculated based on the length of time they were outstanding before settlement. Rayonier will distribute additional shares upon maturity of the warrants for the 2015 Notes if the stock price exceeds $39.35 per share. For information on the potential dilutive impact of the Senior Exchangeable Notes, warrants and exchangeable note hedges, see Note 11 — Debt in the 2012 Annual Report on Form 10-K and Note 16 — Debt of this Form 10-Q.
(b) The higher shares used for the assumed conversion of the warrants were primarily due to an increase in the average stock price from $43.74 for the three months ended June 30, 2012 to $57.15 for the three months ended June 30, 2013 and from $44.40 for the six months ended June 30, 2012 to $56.34 for the six months ended June 30, 2013 . The impact of the higher stock price was partially offset by a decrease in dilutive shares due to the maturity of the warrants on the Notes due 2012.

4.
INCOME TAXES
Rayonier is a real estate investment trust (“REIT”). In general, only its taxable REIT subsidiaries, whose businesses include the Company’s non-REIT qualified activities, and foreign operations are subject to corporate income taxes. However, the Company was subject to U.S. federal corporate income tax on built-in gains (the excess of fair market value over tax basis for property held upon REIT election at January 1, 2004) on taxable sales of such property during calendar years 2004 through 2010. In 2011, the law provided a built-in-gains tax holiday. In 2013, the law provided a built-in gains tax holiday for 2012 (retroactive) and 2013. Accordingly, the provision for corporate income taxes relates principally to current and deferred taxes on taxable REIT subsidiaries’ income and foreign operations.
Alternative Fuel Mixture Credit (“AFMC”) and Cellulosic Biofuel Producer Credit (“CBPC”)
The U.S. Internal Revenue Code allowed two credits for taxpayers that produced and used an alternative fuel in the operation of their business through December 31, 2009. The AFMC is a $.50 per gallon refundable tax credit (which is not taxable), while the CBPC is a $1.01 per gallon credit that is nonrefundable, taxable and has limitations based on an entity’s tax liability. Rayonier produces and uses an alternative fuel (“black liquor”) at its Jesup, Georgia and Fernandina Beach, Florida performance fibers mills, which qualified for both credits. The Company claimed the AFMC on its 2009 tax return.
In the first quarter of 2013 and the second quarter of 2012, management approved the exchange of approximately 120 million and 60 million gallons respectively, of black liquor previously claimed for the AFMC for the CBPC. As a result, the Company recorded a $19 million tax benefit in first quarter 2013. The second quarter 2012 impact of the exchange was a $9.1 million tax benefit partially offset by a $3.4 million interest expense accrual. The IRS later released guidance stating interest payments are not required for AFMC funds exchanged for the CBPC, based upon the manner of the Company's original claim. As such, Rayonier subsequently reversed the interest expense in third quarter 2012. For additional information on the AFMC and CBPC, see Note 8 — Income Taxes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Provision for Income Taxes from Continuing Operations
The Company’s effective tax rate is below the 35 percent U.S. statutory tax rate primarily due to tax benefits associated with being a REIT. The Company’s effective tax rate in 2013 was lower than 2012 primarily due to recording the additional AFMC exchange, the federal research and experimentation tax credit and a $4.9 million benefit associated with the completion of an

7

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

internal transfer of properties.
The table below reconciles the U.S. statutory rate to the Company’s effective tax rate for each period presented (in millions of dollars):
Three Months Ended June 30,
2013
2012
Income tax expense at federal statutory rate
$
36

35.0
%
$
27

35.0
%
REIT income not subject to tax
(15
)
(14.3
)
(6
)
(8.7
)
Income tax expense before discrete items
21

20.7
%
21

26.3
%
Exchange of AFMC for CBPC
—

—

(9
)
(10.9
)
Other
(6
)
(5.9
)
—

—

Income tax expense as reported
$
15

14.8
%
$
12

15.4
%

Six Months Ended June 30,
2013
2012
Income tax expense at federal statutory rate
$
74

35.0
%
$
52

35.0
%
REIT income not subject to tax
(26
)
(12.4
)
(12
)
(8.1
)
Other
(2
)
(0.7
)
(1
)
(0.5
)
Income tax expense before discrete items
46

21.9
%
39

26.4
%
Exchange of AFMC for CBPC
(19
)
(8.9
)
(9
)
(6.0
)
Gain related to consolidation of New Zealand joint venture
(5
)
(2.7
)
—

—

Other
(2
)
(1.0
)
—

—

Income tax expense as reported
$
20

9.3
%
$
30

20.4
%
Provision for Income Taxes from Discontinued Operations
In the first quarter, Rayonier completed the sale of its Wood Products business for $80 million plus a working capital adjustment . For the six months ended June 30, 2013 and 2012 , income tax expense related to discontinued operations was $22.3 million ( $21.4 million from the gain on sale) and $1.9 million , respectively. For the three months ended June 30, 2012 , income tax related to discontinued operations was $1.5 million . See Note 2 — Sale of Wood Products Business for additional information.

5.
RESTRICTED DEPOSITS
In order to qualify for like-kind exchange (“LKE”) treatment, the proceeds from real estate sales must be deposited with a third-party intermediary. These proceeds are accounted for as restricted cash until a suitable replacement property is acquired. In the event LKE purchases are not completed, the proceeds are returned to the Company after 180 days and reclassified as available cash. As of June 30, 2013 and December 31, 2012 , the Company had $3.0 million and $10.6 million , respectively, of proceeds from real estate sales classified as restricted cash in Other Assets, which were deposited with an LKE intermediary.

6.
JOINT VENTURE INVESTMENT
On April 4, 2013 (the “acquisition date”), the Company acquired an additional 39 percent ownership interest in Matariki Forestry Group , a joint venture (“JV”) that owns or leases approximately 0.3 million acres of New Zealand timberlands. As a result of the acquisition, Rayonier is a 65 percent owner of the JV and 100 percent of the results of its operations subsequent to April 4, 2013 have been included in the Company’s consolidated financial statements, along with 100 percent of the JV’s assets and liabilities at June 30, 2013 . The portions of the consolidated financial position and results of operations attributable to the JV’s 35 percent noncontrolling interest are also shown separately. Rayonier New Zealand Limited (“RNZ”), a wholly-owned subsidiary of Rayonier Inc., continues to serve as the manager of the JV forests and operates a log trading business.
The purchase price of the additional interest in the JV was $139.9 million , which included $3.3 million of contingent consideration and was financed through our term credit agreement. As the purchase price was in New Zealand dollars, the Company

8

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

purchased foreign currency forward contracts to mitigate foreign currency risk on the purchase price. As a result, the Company recorded a benefit of $1.7 million and received that amount upon maturity of the contracts on April 2, 2013.
The contingent consideration arrangement required the Company to pay an additional consideration to the JV’s selling (former) shareholders equal to a multiple of the increase in log prices for a six month period beginning in November 2012. We estimated the fair value of the contingent consideration arrangement at the acquisition date to be $3.3 million . Fair value was determined using an average of the cost and freight (CFR) selling price of China A-grade 3.8 meter logs. As of June 30, 2013, the contingent consideration had been determined and paid in the amount of $3.3 million .
Prior to the acquisition date, the Company accounted for its 26 percent interest in the JV as an equity method investment. The additional 39 percent interest acquired resulted in the Company obtaining a controlling financial interest in the JV and accordingly, the purchase was accounted for as a step-acquisition. Upon consolidation, the Company recognized a $10.1 million deferred gain, which resulted from the original sale of its New Zealand operations to the joint venture in 2005 and a $6 million benefit due to the required fair market value remeasurement of the Company’s equity interest in the JV held before the purchase of the additional interest. Both gains are included in the line item “Gain related to consolidation of New Zealand joint venture” in the Consolidated Statements of Income and Comprehensive Income. The acquisition-date fair value of the previous equity interest was $93.3 million .
We have applied estimates and judgments in order to determine the fair value of assets acquired and liabilities assumed at the acquisition date. In determining fair value we utilized valuation methodologies including discounted cash flow analysis. The assumptions made in performing these valuations include assumptions as to discount rates, foreign exchange rates, and commodity prices. Any significant change in key assumptions may cause the acquisition accounting to be revised.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
April 4, 2013
Accounts receivable, net
$
9,777

Inventory
2,465

Other current assets
6,767

Timber and timberlands, net
545,287

Other assets
25,436

Total identifiable assets acquired
589,732

Accounts payable
11,679

Current maturities of long-term debt
3,843

Accrued interest
2,038

Other current liabilities
3,624

Long-term debt (third party)
196,319

Long-term debt (shareholders) (a)
125,532

Other non-current liabilities
13,565

Total liabilities assumed
356,600

Net identifiable assets
233,132

Less: Fair value of equity method investment
(93,253
)
Purchase price
$
139,879

(a) Long-term debt included $125.5 million of shareholder loans payable to the noncontrolling interest by the JV . Subsequent to the acquisition date, $96.0 million of the noncontrolling interest’s shareholder loans were converted to preferred equity .

9

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

The Company’s operating results for the three and six months ended June 30, 2013 reflect 26 percent of the JV’s income prior to the acquisition date, as reported in “Equity in income of New Zealand joint venture” in the Consolidated Statements of Income and Comprehensive Income. The amounts of revenue and earnings of the JV included in the Company’s Consolidated Statements of Income and Comprehensive Income from the acquisition date to the period ended June 30, 2013 are as follows:
Revenue and earnings from
April 4, 2013 to June 30, 2013
Sales
$
47,426

Net Income
2,076

The following represents the pro forma consolidated sales and net income as if the JV had been included in the consolidated results of the Company for the three and six months ended June 30, 2013 and 2012 :
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Sales
$
409,077

$
399,228

$
837,322

$
778,810

Net Income
$
87,891

$
67,376

$
233,867

$
118,730



10

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

7.
SHAREHOLDERS’ EQUITY
An analysis of shareholders’ equity for the six months ended June 30, 2013 and the year ended December 31, 2012 is shown below (share amounts not in thousands):
Rayonier Inc. Shareholders
Common Shares
Retained
Earnings
Accumulated Other Comprehensive Income/(Loss)
Non-controlling Interest
Total Shareholders’
Equity
Shares
Amount
Balance, December 31, 2011
122,035,177

$
630,286

$
806,235

$
(113,448
)
$
—

$
1,323,073

Net income
—

—

278,685

—

—

278,685

Dividends ($1.68 per share)
—

—

(208,286
)
—

—

(208,286
)
Issuance of shares under incentive stock plans
1,467,024

25,495

—

—

—

25,495

Stock-based compensation
—

15,116

—

—

—

15,116

Excess tax benefit on stock-based compensation
—

7,635

—

—

—

7,635

Repurchase of common shares
(169,757
)
(7,783
)
—

—

—

(7,783
)
Net loss from pension and postretirement plans
—

—

—

(496
)
—

(496
)
Foreign currency translation adjustment
—

—

—

4,352

—

4,352

Joint venture cash flow hedges
—

—

—

213

—

213

Balance, December 31, 2012
123,332,444

$
670,749

$
876,634

$
(109,379
)
$
—

$
1,438,004

Acquisition of noncontrolling interest
—

—

—

—

96,086

96,086

Net income
—

—

234,899

—

727

235,626

Dividends ($0.88 per share)
—

—

(110,886
)
—

—

(110,886
)
Issuance of shares under incentive stock plans
861,838

6,643

—

—

—

6,643

Stock-based compensation
—

6,253

—

—

—

6,253

Excess tax benefit on stock-based compensation
—

7,399

—

—

—

7,399

Repurchase of common shares
(209,743
)
(11,241
)
—

—

—

(11,241
)
Settlement of warrants (Note 16)
2,135,221

—

—

—

—

—

Amortization of pension and postretirement plans
—

—

—

8,687

—

8,687

Foreign currency translation adjustment
—

—

—

(17,650
)
(9,576
)
(27,226
)
Joint venture cash flow hedges
—

—

—

1,431

(656
)
775

Balance, June 30, 2013
126,119,760

$
679,803

$
1,000,647

$
(116,911
)
$
86,581

$
1,650,120


8.
SEGMENT AND GEOGRAPHICAL INFORMATION
Rayonier operates in three reportable business segments: Forest Resources, Real Estate and Performance Fibers. Prior to the first quarter of 2013, the Company operated in four reportable business segments, which included Wood Products. In March 2013, the Company sold its Wood Products business and its operations are shown as discontinued operations for all periods presented. See Note 2 — Sale of Wood Products Business for additional information. On April 4, 2013, Rayonier acquired an additional 39 percent interest in the JV, bringing its total ownership to 65 percent. As a result, the JV’s results of operations have been consolidated and included within the Forest Resources segment since April 4, when the Company acquired control of the entity. Accordingly, the JV’s assets and liabilities are fully consolidated at June 30, 2013 . See Note 6 — Joint Venture Investment for further information regarding the Company’s joint venture.
Forest Resources sales include all activities related to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by the Company’s real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. The Company’s remaining operations include harvesting and selling timber acquired

11

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

from third parties (log trading). These operations are reported in “Other Operations.” 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 the operating income of the segments.
Operating income (loss) as presented in the Consolidated Statements of Income and Comprehensive Income is equal to segment income (loss). 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.
Total assets, sales, operating income (loss) and depreciation, depletion and amortization by segment including Corporate were as follows:
June 30,
December 31,
ASSETS
2013
2012
Forest Resources
$
2,275,145

$
1,690,030

Real Estate
85,018

112,647

Performance Fibers
1,067,673

902,309

Wood Products (a)
—

18,454

Other Operations
31,045

23,296

Corporate and other
369,170

376,215

Total
$
3,828,051

$
3,122,951

(a)
The Company sold its Wood Products segment during the first quarter of 2013. See Note 2 — Sale of Wood Products Business for additional information.
Three Months Ended June 30,
Six Months Ended June 30,
SALES
2013
2012
2013
2012
Forest Resources
$
109,060

$
52,663

$
166,162

$
104,858

Real Estate
13,376

11,680

37,673

24,326

Performance Fibers
253,025

254,509

537,213

505,364

Other Operations
33,872

29,268

62,099

50,409

Intersegment Eliminations (b)
(256
)
(24
)
(351
)
(290
)
Total
$
409,077

$
348,096

$
802,796

$
684,667

(b)
Intersegment eliminations primarily reflect sales from our Forest Resources segment to our Performance Fibers segment.
Three Months Ended June 30,
Six Months Ended June 30,
OPERATING INCOME(LOSS)
2013
2012
2013
2012
Forest Resources
$
20,890

$
8,249

$
34,145

$
16,254

Real Estate
6,105

5,999

22,947

12,477

Performance Fibers
79,081

83,727

170,751

164,357

Other Operations
1,779

1,148

1,944

218

Corporate and other (c)
2,706

(5,025
)
(3,863
)
(16,458
)
Total
$
110,561

$
94,098

$
225,924

$
176,848

(c)
The three and six months ended June 30, 2013 includes a $16.1 million gain related to the consolidation of the New Zealand JV. See Note 6 — Joint Venture Investment .


12

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

Three Months Ended June 30,
Six Months Ended June 30,
DEPRECIATION, DEPLETION AND AMORTIZATION
2013
2012
2013
2012
Forest Resources
$
27,291

$
17,066

$
43,735

$
33,900

Real Estate
2,469

1,600

6,646

3,445

Performance Fibers
13,649

15,139

28,802

26,500

Corporate and other
258

374

476

747

Total
$
43,667

$
34,179

$
79,659

$
64,592


9.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates, interest rates and fuel prices. The Company’s New Zealand JV 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 derivatives 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. The ineffective portion of any hedge as well as 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.
Foreign Currency Exchange and Option Contracts
The functional currency of the Company’s New Zealand-based operations and JV is the New Zealand dollar. These operations are exposed to foreign currency risk on export sales and ocean freight payments which are predominately denominated in US dollars. The Company typically hedges at least 70 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases and 50 percent of the forward twelve months.
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.
Interest Rate Swaps
The Company uses interest rate swaps to manage the JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. By converting a portion of these borrowings from floating rates to fixed rates the Company has reduced the impact of interest rate changes on its expected future cash outflows. As of June 30, 2013 , the Company’s interest rate contracts had maturity dates through January 2020.
Fuel Hedge Contracts
The Company uses fuel swap contracts to manage its JV’s exposure to changes in New Zealand’s domestic diesel prices. The fuel swaps are quoted by domestic banks in New Zealand dollar price terms. As of June 30, 2013 all of the contracts had maturities of less than one year. The fair value of the fuel swap 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.

13

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

The following table demonstrates the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the second quarter and six months ended June 30, 2013 :
June 30, 2013
Income Statement Location
Three Months Ended
Six Months Ended
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts
Other comprehensive income/(loss) (a)
$
(1,509
)
$
(1,509
)
Foreign currency option contracts
Other comprehensive income/(loss) (a)
(363
)
(363
)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts
Other operating (expense) income
(456
)
1,426

Foreign currency option contracts
Other operating (expense) income
(1,491
)
(1,491
)
Interest rate swaps
Interest and other miscellaneous income
2,650

2,650

Fuel hedges
Cost of sales - benefit
148

148

(a)
See Note 17 — Accumulated Other Comprehensive Loss .
During the next 12 months, the amount of the June 30, 2013 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $1.9 million .
The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheet at June 30, 2013 :
June 30, 2013
Notional Amount (a)
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts
19,000

Foreign currency option contracts
26,000

Derivatives not designated as hedging instruments:
Foreign currency exchange contracts
7,020

Foreign currency option contracts
30,000

Interest rate swaps
172,497

Fuel contracts
40

(a) All notional amounts are stated in dollars except fuel contracts which are denominated in thousands of barrels.

14

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 Sheet at June 30, 2013 :
June 30, 2013
Location on Balance Sheet
Fair Value Assets (Liabilities) (a)
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts
Other current liabilities
(891
)
Foreign currency option contracts
Other current liabilities
(363
)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts
Other current liabilities
(174
)
Foreign currency option contracts
Other current liabilities
(352
)
Interest rate swaps
Other current liabilities
(2,843
)
Other non-current liabilities
(6,443
)
Fuel contracts
Other assets
69

Total derivative contracts:
Other assets
69

Total derivative assets
$
69

Other current liabilities
(4,623
)
Other non-current liabilities
(6,443
)
Total derivative liabilities
$
(11,066
)
(a)
See Note 10 — Fair Value Measurements for further information on the fair value of our 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.

10.
FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The Accounting Standards Codification established a three-level hierarchy that prioritizes the inputs used to measure fair value 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.

15

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

The following table presents the carrying amount, estimated fair values and categorization under the fair value hierarchy of financial instruments held by the Company at June 30, 2013 and December 31, 2012 , using market information and what management believes to be appropriate valuation methodologies under generally accepted accounting principles:
June 30, 2013
December 31, 2012
Asset (liability)
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Level 1
Level 2
Level 1
Level 2
Cash and cash equivalents
$
343,581

$
343,581

$
—

$
280,596

$
280,596

$
—

Restricted cash (a)
2,956

2,956

—

10,559

10,559

—

Current maturities of long-term debt
(75,463
)
—

(75,463
)
(150,000
)
—

(150,000
)
Long-term debt
(1,591,834
)
—

(1,718,249
)
(1,120,052
)
—

(1,250,341
)
Interest rate swaps (b)
(9,286
)
—

(9,286
)
—

—

—

Foreign currency exchange contracts (b)
(1,065
)
—

(1,065
)
—

—

—

Foreign currency option contracts (b)
(716
)
—

(716
)
—

—

—

Fuel contracts (b)
69

—

69

—

—

—

(a)
Restricted cash is recorded in “Other Assets” and represents the proceeds from LKE sales deposited with a third-party intermediary.
(b)
See Note 9 — 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 options contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.
Fuel contracts — The fair value of diesel fuel 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.

16

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

11.
GUARANTEES
The Company provides financial guarantees as required by creditors, insurance programs, and various governmental agencies. As of June 30, 2013 , the following financial guarantees were outstanding:
Financial Commitments
Maximum Potential
Payment
Carrying Amount
of Liability
Standby letters of credit (a)
$
18,205

$
15,000

Guarantees (b)
2,254

43

Surety bonds (c)
7,231

1,360

Total financial commitments
$
27,690

$
16,403

(a)
Approximately $15 million of the standby letters of credit serve as credit support for industrial revenue bonds. The remaining letters of credit support various insurance related agreements, primarily workers’ compensation and pollution liability policy requirements. These letters of credit will expire at various dates during 2013 and 2014 and will be renewed as required.
(b)
In conjunction with a timberland sale and note monetization in the first quarter of 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 June 30, 2013 , the Company has a de minimus liability to reflect the fair market value of its obligation to perform under the make-whole agreement.
(c)
Rayonier issues surety bonds primarily to secure timber harvesting obligations in the State of Washington and to provide collateral for the Company’s workers’ compensation self-insurance program in that state. These surety bonds expire at various dates between 2013 and 2014 and are expected to be renewed as required.
12.
COMMITMENTS
As disclosed in the Company’s Annual Report on Form 10-K, Rayonier leases certain buildings, machinery and equipment under various operating leases. The Company’s commitments have not materially changed since December 31, 2012 except as related to the acquisition of a controlling interest in the New Zealand joint venture. The following table shows the increase in the Company’s commitments, as of June 30, 2013 , as a result of the JV acquisition:
Forestry Rights (a)
Forest
Leases (b)
Remaining 2013
$
884

$
541

2014
1,528

1,075

2015
1,528

1,075

2016
1,528

1,075

2017
1,528

1,075

Thereafter
39,757

53,889

$
46,753

$
58,730

(a) Forestry rights grant access to the leased land for the purpose of harvesting. The majority of the JV’s forestry rights terminate with the harvest of the land’s existing crop and require the land to be left in the cut condition upon termination.
(b) Forest leases have an average term between 30 and 99 years. Annual rent is indexed to the Consumer Price Index or current market values. A number of these leases require the land to be returned in a fully stocked condition (replanted).
The JV has a number of Crown Forest Licenses (“CFL”) with the New Zealand government. The leases extend indefinitely and may only be terminated upon a 35 year termination notice from the government. If no termination notice is given, the leases renew automatically each year for a one year term. As of June 30, 2013, the JV has three CFL’s under termination notice, with one terminating in 2034 and the remaining two expiring in 2062. The annual license fee is determined based on current market value, with three yearly rent reviews. The total annual license fee on the CFL’s is $2.7 million per year.



17

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

13.
LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
An analysis of the liabilities for dispositions and discontinued operations follows:
June 30,
December 31,
2013
2012
Balance, beginning of period
$
81,695

$
90,824

Expenditures charged to liabilities
(4,015
)
(9,926
)
Increase to liabilities
448

797

Balance, end of period
78,128

81,695

Less: Current portion
(8,686
)
(8,105
)
Non-current portion
$
69,442

$
73,590

The Company is exposed to the risk of reasonably possible additional losses in excess of the established liabilities. As of June 30, 2013, this amount could range up to $29 million, attributable to several of the applicable sites, and arises from uncertainty over the availability, feasibility and effectiveness of certain remediation technologies, additional or different contamination that may be discovered, development of new or more effective environmental remediation technologies, potential changes in applicable law and regulations, and the exercise of discretion in interpretation of applicable law and regulations by governmental agencies.
The Company believes established liabilities are sufficient for probable costs expected to be incurred over the next 20 years with respect to its dispositions and discontinued operations. Remedial actions for these sites vary, but include on-site (and in certain cases off-site) removal or treatment of contaminated soils and sediments, recovery and treatment/remediation of groundwater, and source remediation and/or control.
14.
CONTINGENCIES
Rayonier is engaged in various legal actions, including certain environmental proceedings, and has 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 other 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.

15.
EMPLOYEE BENEFIT PLANS
The Company has four qualified non-contributory defined benefit pension plans covering a significant majority of its employees and an unfunded plan that provides benefits in excess of amounts allowable under current tax law in the qualified plans . Currently, all qualified plans are closed to new participants. Employee benefit plan liabilities are calculated using actuarial estimates and management assumptions. These estimates are based on historical information, along with certain assumptions about future events. Changes in assumptions, as well as changes in actual experience, could cause the estimates to change.
The net pension and postretirement benefit costs that have been recognized during the stated periods are shown in the following tables:
Pension
Postretirement
Three Months Ended June 30,
Three Months Ended June 30,
2013
2012
2013
2012
Components of Net Periodic Benefit Cost
Service cost
$
2,011

$
2,102

$
249

$
227

Interest cost
3,953

4,321

240

242

Expected return on plan assets
(5,966
)
(6,369
)
—

—

Amortization of prior service cost
322

327

6

6

Amortization of losses
4,791

4,394

218

156

Net periodic benefit cost
$
5,111

$
4,775

$
713

$
631


18

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

Pension
Postretirement
Six Months Ended
June 30,
Six Months Ended
June 30,
2013
2012
2013
2012
Components of Net Periodic Benefit Cost
Service cost
$
4,430

$
4,042

$
498

$
437

Interest cost
8,787

8,309

480

465

Expected return on plan assets
(13,390
)
(12,248
)
—

—

Amortization of prior service cost
710

629

13

12

Amortization of losses
10,516

8,451

436

299

Net periodic benefit cost
$
11,053

$
9,183

$
1,427

$
1,213

In 2013, the Company has no mandatory pension contribution requirements, but may make discretionary contributions.

16.
DEBT
The warrants sold in conjunction with the issuance of the 3.75% Senior Exchangeable Notes due 2012 began maturing on January 15, 2013 and continued to mature through March 27, 2013 . As of June 30, 2013 , all of the 8,313,511 warrants have settled, resulting in the issuance of 2,135,221 Rayonier common shares.
As of March 31, 2013 , the $172.5 million 4.50 % Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending June 30, 2013 . Per the indenture, in order for the notes to become exchangeable, the Company’s stock price must exceed 130 percent of the exchange price for 20 trading days during a period of 30 consecutive trading days as of the last day of the quarter. During the three months ended June 30, 2013 , the note holders did not elect to exercise the exchange option. Based upon the average stock price for the 30 trading days ended June 30, 2013 , these notes again became exchangeable at the option of the holder for the calendar quarter ending September 30, 2013 . The entire balance of the notes remained classified as long-term debt at June 30, 2013 due to the ability and intent of the Company to refinance them on a long-term basis.
During the six months ended June 30, 2013 , the Company made net repayments of $15 million on its $450 million unsecured revolving credit facility. The Company had $187 million of available borrowings under this facility at June 30, 2013 . The Company also borrowed an additional $200 million on the term credit agreement during the second quarter of 2013 for general corporate purposes. Additional draws totaling $140 million remain available on the term credit agreement.
Joint Venture Debt
On April 4, 2013 , Rayonier acquired an additional 39 percent interest in its New Zealand JV, bringing its total ownership to 65 percent and as a result, the JV’s debt was consolidated effective on that date. See Note 6 — Joint Venture Investment for further information.
The JV’s debt consisted of the following at June 30, 2013 :
June 30, 2013
Senior Secured Facilities Agreement
Revolving Credit Facility due 2014 at variable interest rate of 3.61%
$
123,488

Revolving Credit Facility due 2016 at variable interest rate of 3.76%
57,885

Working Capital Facility due 2013 at variable interest rate of 3.94%
463

Noncontrolling interest shareholder loan at a 0% interest rate
29,571

Total debt
211,407

Less: Current maturities of long-term debt
(463
)
Long-term debt
$
210,944


19

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

Senior Secured Facilities Agreement
The New Zealand JV is party to a $199 million variable rate Senior Secured Facilities Agreement, comprised of two tranches of revolving credit facilities and a working capital facility . Although the maximum amounts available under the agreement are denominated in New Zealand dollars , advances are also available in U.S. dollars. This agreement is secured by a Security Trust Deed that provides recourse only to the JV’s assets; there is no recourse to Rayonier Inc. or any of its subsidiaries.
Revolving Credit Facilities
As of June 30, 2013 the Senior Secured Facilities Agreement had $123 million outstanding on Tranche A at 3.61 percent due September 2014 and $58 million outstanding on Tranche B at 3.76 percent due September 2016 . The interest rates for both tranches are indexed to the 90 day New Zealand bank bill rate and are generally repriced at quarterly intervals. The margin on the index rate fluctuates based on the interest coverage ratio. The JV manages these rates through interest rate swaps, as discussed at Note 9 — Derivative Financial Instruments and Hedging Activities .
Working Capital Facility
The $18 million Working Capital Facility is available for short-term operating cash flow needs of the New Zealand JV. This facility holds a variable interest rate indexed to the Official Cash Rate set by the Reserve Bank of New Zealand . The margin ranges from 1.17 percent to 1.44 percent based on the interest coverage ratio and the length of time each borrowing is outstanding. At June 30, 2013, $0.5 million is outstanding at 3.94 percent and due September 2013 .
Shareholder Loan
The shareholder loan is an interest-free loan from the noncontrolling JV interest in the amount of $30 million. This loan represents part of the noncontrolling party’s investment in the JV. The loan is secured by timberlands owned by the JV and is subordinated to the Senior Secured Facilities Agreement. Although Rayonier Inc. is not liable for this loan, the shareholder loan instrument contains features with characteristics of both debt and equity and is therefore required to be classified as debt and consolidated. As the loan is effectively at call, the carrying amount is deemed to be the fair value. The entire balance of the shareholder loan remained classified as long-term debt at June 30, 2013 due to the ability and intent of the JV to refinance it on a long-term basis.
Debt Covenants
In connection with the New Zealand JV’s Senior Secured Facilities Agreement, covenants must be met, including generation of sufficient cash flows to meet a minimum interest coverage ratio of 1.50 to 1 on a quarterly basis and maintenance of a leverage ratio of bank debt versus the forest and land valuation below the covenant's maximum ratio of 35 percent. At June 30, 2013, the New Zealand JV was in compliance with all its covenants.
There were no other significant changes to the Company’s outstanding debt as reported in Note 11 — Debt in the Company’s 2012 Annual Report on Form 10-K.
Subsequent Event
On July 5, 2013 the New Zealand JV negotiated amendments to the existing Senior Secured Facilities Agreement. The amended and restated Senior Secured Facilities Agreement is now comprised of two tranches; a $181 million revolving cash advance facility (“Tranche A”) expiring September 2016 and an $18 million working capital facility (“Tranche B”) expiring July 2014 . In addition to the extended maturity dates, the amended and restated agreement provides for favorable changes to the interest rate margin and covenant requirements. The margin for revolving cash advance borrowings now ranges from 0.75 percent to 0.85 percent (previously 0.775 percent to 1.05 percent ). There was no change to the working capital facility interest rate. The maximum leverage ratio was increased to 40 percent and the interest coverage ratio was amended to allow a minimum ratio of 1.25 to 1, provided that the ratio is not below 1.50 to 1 for any two consecutive quarters.

20

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

17.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated Other Comprehensive Loss was comprised of the following:
Foreign currency translation gains
New Zealand joint venture cash flow hedges
Unrecognized components of employee benefit plans, net of tax
Total
Balance as of December 31, 2012
$
38,829

$
(3,628
)
$
(144,580
)
$
(109,379
)
Other comprehensive income before reclassifications
(17,650
)
(a)
(728
)
530

(17,848
)
Amounts reclassified from accumulated other comprehensive income
—

2,159

8,157

(b)
10,316

Net other comprehensive income
(17,650
)
1,431


8,687


(7,532
)
Balance as of June 30, 2013
$
21,179

$
(2,197
)
$
(135,893
)
$
(116,911
)
(a)
The loss is due to a six cent decrease in the New Zealand dollar exchange rate.
(b)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost. See Note 15 — Employee Benefit Plans for additional information.

The following table presents details of the amounts reclassified in their entirety from AOCI for the six-month period ended June 30, 2012:
Details about accumulated other comprehensive income components
Amount reclassified from accumulated other comprehensive income
Affected line item in the statement where net income is presented
New Zealand joint venture cash flow hedges
$
2,159

Gain related to consolidation of New Zealand joint venture

18.
OTHER OPERATING (EXPENSE) INCOME, NET
Other operating (expense) income, net was comprised of the following:
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Lease income, primarily from hunting leases
$
2,313

$
2,520

$
4,774

$
4,905

Other non-timber income
604

1,048

1,078

1,891

Foreign currency gain (loss)
979

680

795

(185
)
Loss on sale or disposal of property, plant & equipment
(269
)
(711
)
(698
)
(1,732
)
Insurance recoveries
—

2,319

—

2,319

Loss on foreign currency contracts
(1,947
)
—

(65
)
—

Legal and corporate development costs
(1,971
)
(561
)
(2,672
)
(765
)
Total
$
(291
)
$
5,295

$
3,212

$
6,433




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 August 2009 TRS issued $172.5 million of 4.50% Senior Exchangeable Notes due 2015 . The notes are guaranteed by Rayonier Inc. as the Parent Guarantor and Rayonier Operating Company LLC (“ROC”) as the Subsidiary Guarantor. In connection with these exchangeable 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 .
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2013
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
409,077

$
—

$
409,077

Costs and Expenses
Cost of sales
—

—

—

297,698

—

297,698

Selling and general expenses
—

2,680

—

14,249

—

16,929

Other operating expense (income), net
180

(74
)
—

846

(661
)
291

180

2,606

—

312,793

(661
)
314,918

Equity in income of New Zealand joint venture
—

—

—

304

—

304

OPERATING (LOSS) INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
(180
)
(2,606
)
—

96,588

661

94,463

Gain related to consolidation of New Zealand joint venture
—

—

—

16,098

—

16,098

OPERATING (LOSS) INCOME
(180
)
(2,606
)
—

112,686

661

110,561

Interest (expense) income
(3,414
)
(266
)
(6,997
)
658

—

(10,019
)
Interest and miscellaneous income (expense), net
1,759

1,104

(797
)
532

—

2,598

Equity in income from subsidiaries
89,064

91,235

35,968

—

(216,267
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
87,229

89,467

28,174

113,876

(215,606
)
103,140

Income tax (expense) benefit
(65
)
(403
)
2,847

(17,691
)
63

(15,249
)
INCOME FROM CONTINUING OPERATIONS
87,164

89,064

31,021

96,185

(215,543
)
87,891

DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income taxes
—

—

—

—

—

—

NET INCOME
87,164

89,064

31,021

96,185

(215,543
)
87,891

Net income attributable to noncontrolling interest
—

—

—

727

—

727

NET INCOME ATTRIBUTABLE TO RAYONIER INC
87,164

89,064

31,021

95,458

(215,543
)
87,164

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment
(18,625
)
(28,201
)
(1,725
)
(18,625
)
38,975

(28,201
)
New Zealand joint venture cash flow hedges
878

222

(1,873
)
877

118

222

Amortization of pension and postretirement plans, net of income tax
3,717

3,717

2,819

6,831

(13,367
)
3,717

Total other comprehensive loss
(14,030
)
(24,262
)
(779
)
(10,917
)
25,726

(24,262
)
COMPREHENSIVE INCOME
73,134

64,802

30,242

85,268

(189,817
)
63,629

Comprehensive loss attributable to noncontrolling interest
—

—

—

(9,505
)
—

(9,505
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
73,134

$
64,802

$
30,242

$
94,773

$
(189,817
)
$
73,134


22

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
For the Three Months Ended June 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
348,096

$
—

$
348,096

Costs and Expenses
Cost of sales
—

—

—

243,571

—

243,571

Selling and general expenses
—

1,904

—

13,988

—

15,892

Other operating income, net
—

(109
)
—

(5,186
)
—

(5,295
)
—

1,795

—

252,373

—

254,168

Equity in income of New Zealand joint venture
—

—

—

170

—

170

OPERATING (LOSS) INCOME
—

(1,795
)
—

95,893

—

94,098

Interest expense
(3,117
)
(212
)
(10,243
)
(2,484
)
—

(16,056
)
Interest and miscellaneous income (expense), net
1,544

1,659

(834
)
(2,285
)
—

84

Equity in income from subsidiaries
70,652

70,948

60,407

—

(202,007
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
69,079

70,600

49,330

91,124

(202,007
)
78,126

Income tax benefit (expense)
—

52

4,043

(16,130
)
—

(12,035
)
INCOME FROM CONTINUING OPERATIONS
69,079

70,652

53,373

74,994

(202,007
)
66,091

DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax
—

—

—

2,988

—

2,988

NET INCOME
69,079

70,652

53,373

77,982

(202,007
)
69,079

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment
(8,081
)
(8,081
)
478

(8,081
)
15,684

(8,081
)
New Zealand joint venture cash flow hedges
(1,998
)
(1,998
)
—

(1,998
)
3,996

(1,998
)
Amortization of pension and postretirement plans, net of income tax
3,401

3,401

2,579

2,579

(8,559
)
3,401

Total other comprehensive (loss) income
(6,678
)
(6,678
)
3,057

(7,500
)
11,121

(6,678
)
COMPREHENSIVE INCOME
$
62,401

$
63,974

$
56,430

$
70,482

$
(190,886
)
$
62,401



23

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

CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2013
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
802,796

$
—

$
802,796

Costs and Expenses
Cost of sales
—

—

—

563,716

—

563,716

Selling and general expenses
—

5,081

—

27,947

—

33,028

Other operating (income) expense, net
(1,701
)
449

—

(1,299
)
(661
)
(3,212
)
(1,701
)
5,530

—

590,364

(661
)
593,532

Equity in income of New Zealand joint venture
—

—

—

562

—

562

OPERATING (LOSS) INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
1,701

(5,530
)
—

212,994

661

209,826

Gain related to consolidation of New Zealand joint venture
—

—

—

16,098

—

16,098

OPERATING INCOME (LOSS)
1,701

(5,530
)
—

229,092

661

225,924

Interest expense
(6,689
)
(518
)
(13,615
)
3,086

—

(17,736
)
Interest and miscellaneous income (expense), net
4,178

1,633

(1,548
)
(1,607
)
—

2,656

Equity in income from subsidiaries
235,774

240,000

159,437

—

(635,211
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
234,964

235,585

144,274

230,571

(634,550
)
210,844

Income tax (expense) benefit
(65
)
189

5,537

(25,418
)
62

(19,695
)
INCOME FROM CONTINUING OPERATIONS
234,899

235,774

149,811

205,153

(634,488
)
191,149

DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income tax
—

—

—

44,477

—

44,477

NET INCOME
234,899

235,774

149,811

249,630

(634,488
)
235,626

Net income attributable to noncontrolling interest
—

—

—

727

—

727

NET INCOME ATTRIBUTABLE TO RAYONIER INC
234,899

235,774

149,811

248,903

(634,488
)
234,899

OTHER COMPREHENSIVE INCOME


Foreign currency translation adjustment
(17,650
)
(27,226
)
(1,485
)
(17,650
)
36,785

(27,226
)
New Zealand joint venture cash flow hedges
1,431

775

(1,873
)
1,431

(989
)
775

Amortization of pension and postretirement plans, net of income tax
8,687

8,687

6,831

6,831

(22,349
)
8,687

Total other comprehensive (loss) income
(7,532
)
(17,764
)
3,473

(9,388
)
13,447

(17,764
)
COMPREHENSIVE INCOME
227,367

218,010

153,284

240,242

(621,041
)
217,862

Comprehensive loss attributable to noncontrolling interest
—

—

—

(9,505
)
—

(9,505
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
227,367

$
218,010

$
153,284

$
249,747

$
(621,041
)
$
227,367


24

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

CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-Guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
—

$
684,667

$
—

$
684,667

Costs and Expenses
Cost of sales
—

—

—

479,279

—

479,279

Selling and general expenses
—

5,215

—

29,942

—

35,157

Other operating expense (income), net
—

12

—

(6,445
)
—

(6,433
)
—

5,227

—

502,776

—

508,003

Equity in income of New Zealand joint venture
—

—

—

184

—

184

OPERATING (LOSS) INCOME
—

(5,227
)
—

182,075

—

176,848

Interest expense
(4,366
)
(450
)
(20,469
)
(2,595
)
—

(27,880
)
Interest and miscellaneous income (expense), net
3,455

2,986

(2,042
)
(4,339
)
—

60

Equity in income from subsidiaries
123,426

126,394

106,152

—

(355,972
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
122,515

123,703

83,641

175,141

(355,972
)
149,028

Income tax (expense) benefit
—

(277
)
8,217

(38,278
)
—

(30,338
)
INCOME FROM CONTINUING OPERATIONS
122,515

123,426

91,858

136,863

(355,972
)
118,690

DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income taxes
—

—

—

3,825

—

3,825

NET INCOME
122,515

123,426

91,858

140,688

(355,972
)
122,515

OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment
(2,255
)
(2,255
)
376

(2,255
)
4,134

(2,255
)
New Zealand joint venture cash flow hedges
(793
)
(793
)
—

(793
)
1,586

(793
)
Amortization of pension and postretirement plans, net of income tax
6,541

6,541

4,959

4,959

(16,459
)
6,541

Total other comprehensive income
3,493

3,493

5,335

1,911

(10,739
)
3,493

COMPREHENSIVE INCOME
$
126,008

$
126,919

$
97,193

$
142,599

$
(366,711
)
$
126,008






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 June 30, 2013
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
170,442

$
6,449

$
26,790

$
139,900

$
—

$
343,581

Accounts receivable, less allowance for doubtful accounts
—

15

892

115,631

—

116,538

Inventory
—

—

—

99,091

—

99,091

Deferred tax assets
—

—

—

55,563

—

55,563

Prepaid and other current assets
—

2,136

639

64,669

—

67,444

Total current assets
170,442

8,600

28,321

474,854

—

682,217

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

—

—

2,080,611

—

2,080,611

NET PROPERTY, PLANT AND EQUIPMENT
—

2,217

—

850,215

—

852,432

INVESTMENT IN SUBSIDIARIES
1,575,156

1,696,714

1,037,668

—

(4,309,538
)
—

INTERCOMPANY NOTES RECEIVABLE
217,073

—

20,166

—

(237,239
)
—

OTHER ASSETS
3,928

30,171

4,513

174,179

—

212,791

TOTAL ASSETS
$
1,966,599

$
1,737,702

$
1,090,668

$
3,579,859

$
(4,546,777
)
$
3,828,051

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
1,129

$
505

$
131,621

$
—

$
133,255

Current maturities of long-term debt
75,000

—

—

463

—

75,463

Accrued taxes
—

2,603

—

17,555

—

20,158

Accrued payroll and benefits
—

10,689

—

9,800

—

20,489

Accrued interest
3,060

538

3,753

2,484

—

9,835

Accrued customer incentives
—

—

—

10,743

—

10,743

Other current liabilities
—

3,189

—

48,653

—

51,842

Current liabilities for dispositions and discontinued operations
—

—

—

8,686

—

8,686

Total current liabilities
78,060

18,148

4,258

230,005

—

330,471

LONG-TERM DEBT
325,000

—

979,511

287,323

—

1,591,834

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

—

69,442

—

69,442

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

130,244

—

28,350

—

158,594

OTHER NON-CURRENT LIABILITIES
—

13,989

—

13,601

—

27,590

INTERCOMPANY PAYABLE
—

165

—

265,823

(265,988
)
—

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,563,539

1,575,156

106,899

2,598,734

(4,280,789
)
1,563,539

Noncontrolling interest
—

—

—

86,581

—

86,581

TOTAL SHAREHOLDERS’ EQUITY
1,563,539

1,575,156

106,899

2,685,315

(4,280,789
)
1,650,120

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,966,599

$
1,737,702

$
1,090,668

$
3,579,859

$
(4,546,777
)
$
3,828,051


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, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
252,888

$
3,966

$
19,358

$
4,384

$
—

$
280,596

Accounts receivable, less allowance for doubtful accounts
—

386

—

99,973

—

100,359

Inventory
—

—

—

127,966

—

127,966

Deferred tax assets
—

—

—

15,845

—

15,845

Prepaid and other current assets
—

1,566

691

39,251

—

41,508

Total current assets
252,888

5,918

20,049

287,419

—

566,274

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

—

—

1,573,309

—

1,573,309

NET PROPERTY, PLANT AND EQUIPMENT
—

2,321

—

704,717

—

707,038

INVESTMENT IN JOINT VENTURE
—

—

—

72,419

—

72,419

INVESTMENT IN SUBSIDIARIES
1,445,205

1,677,782

1,452,027

—

(4,575,014
)
—

INTERCOMPANY NOTES RECEIVABLE
213,863

14,000

19,831

—

(247,694
)
—

OTHER ASSETS
4,148

27,779

5,182

166,802

—

203,911

TOTAL ASSETS
$
1,916,104

$
1,727,800

$
1,497,089

$
2,804,666

$
(4,822,708
)
$
3,122,951

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
2,099

$
33

$
68,249

$
—

$
70,381

Current maturities of long-term debt
150,000

—

—

—

—

150,000

Accrued taxes
—

485

—

13,339

—

13,824

Accrued payroll and benefits
—

15,044

—

13,024

—

28,068

Accrued interest
3,100

379

3,197

1,280

—

7,956

Accrued customer incentives
—

—

—

10,849

—

10,849

Other current liabilities
—

2,925

—

15,715

—

18,640

Current liabilities for dispositions and discontinued operations
—

—

—

8,105

—

8,105

Total current liabilities
153,100

20,932

3,230

130,561

—

307,823

LONG-TERM DEBT
325,000

—

718,321

76,731

—

1,120,052

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

—

73,590

—

73,590

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

129,156

—

30,426

—

159,582

OTHER NON-CURRENT LIABILITIES
—

16,432

—

7,468

—

23,900

INTERCOMPANY PAYABLE
—

116,075

—

137,797

(253,872
)
—

TOTAL SHAREHOLDERS’ EQUITY
1,438,004

1,445,205

775,538

2,348,093

(4,568,836
)
1,438,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,916,104

$
1,727,800

$
1,497,089

$
2,804,666

$
(4,822,708
)
$
3,122,951


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 Six Months Ended June 30, 2013
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
248,552

$
247,599

$
64,000

$
212,977

$
(537,456
)
$
235,672

INVESTING ACTIVITIES
Capital expenditures
—

(89
)
—

(94,037
)
—

(94,126
)
Purchase of additional interest in New Zealand joint venture
—

—

—

(139,879
)
—

(139,879
)
Purchase of timberlands
—

—

—

(10,447
)
—

(10,447
)
Intercompany purchase of real estate
—

—

—

984

(984
)
—

Jesup mill cellulose specialties expansion
—

—

—

(100,185
)
—

(100,185
)
Proceeds from the disposition of Wood Products business
—

—

—

72,953

—

72,953

Change in restricted cash
—

—

—

7,603

—

7,603

Investment in Subsidiaries
(138,178
)
(138,178
)
(249,481
)
—

525,837

—

Other
—

1,700

—

18,376

—

20,076

CASH (USED FOR) INVESTING ACTIVITIES
(138,178
)
(136,567
)
(249,481
)
(244,632
)
524,853

(244,005
)
FINANCING ACTIVITIES

Issuance of debt
175,000

—

280,000

—

—

455,000

Repayment of debt
(250,000
)
—

(23,087
)
—

—

(273,087
)
Dividends paid
(113,222
)
—

—

—

—

(113,222
)
Proceeds from the issuance of common shares
6,643

—

—

—

—

6,643

Excess tax benefits on stock-based compensation
—

—

—

7,399

—

7,399

Repurchase of common shares
(11,241
)
—

—

—

—

(11,241
)
Intercompany distributions
—

(108,549
)
(64,000
)
159,946

12,603

—

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(192,820
)
(108,549
)
192,913

167,345

12,603

71,492

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

—

(174
)
—

(174
)
CASH AND CASH EQUIVALENTS

Change in cash and cash equivalents
(82,446
)
2,483

7,432

135,516

—

62,985

Balance, beginning of year
252,888

3,966

19,358

4,384

—

280,596

Balance, end of period
$
170,442

$
6,449

$
26,790

$
139,900

$
—

$
343,581



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 Six Months Ended June 30, 2012
Rayonier Inc.
(Parent
Guarantor)
ROC (Subsidiary Guarantor)
Rayonier TRS
Holdings Inc.
(Issuer)
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
3,173

$
51,579

$
12,000

$
181,124

$
(39,000
)
$
208,876

INVESTING ACTIVITIES
Capital expenditures
—

(165
)
—

(76,081
)
—

(76,246
)
Purchase of timberlands
—

—

—

(8,687
)
—

(8,687
)
Jesup mill cellulose specialties expansion
—

—

—

(63,998
)
—

(63,998
)
Change in restricted cash
—

—

—

(14,427
)
—

(14,427
)
Investment in Subsidiaries
(5,181
)
—

(39,436
)
—

44,617

—

Other
—

(69
)
—

(635
)
—

(704
)
CASH USED FOR INVESTING ACTIVITIES
(5,181
)
(234
)
(39,436
)
(163,828
)
44,617

(164,062
)
FINANCING ACTIVITIES
Issuance of debt
325,000

—

15,000

15,000

—

355,000

Repayment of debt
(120,000
)
(30,000
)
(23,110
)
(15,000
)
—

(188,110
)
Dividends paid
(98,201
)
—

—

—

—

(98,201
)
Proceeds from the issuance of common shares
3,980

—

—

—

—

3,980

Excess tax benefits on stock-based compensation
—

—

—

4,234

—

4,234

Debt issuance costs
(3,653
)
—

—

—

—

(3,653
)
Repurchase of common shares
(7,783
)
—

—

—

—

(7,783
)
Intercompany distributions
—

5,181

(9,233
)
9,669

(5,617
)
—

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
99,343

(24,819
)
(17,343
)
13,903

(5,617
)
65,467

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

—

219

—

219

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
97,335

26,526

(44,779
)
31,418

—

110,500

Balance, beginning of year
—

8,977

59,976

9,650

—

78,603

Balance, end of period
$
97,335

$
35,503

$
15,197

$
41,068

$
—

$
189,103



29

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

In March 2012 , Rayonier Inc. issued $325 million of 3.75% Senior Notes due 2022 . The notes are fully and unconditionally guaranteed by ROC and Rayonier TRS Holdings Inc. In connection with these notes, the Company provides the following 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 .
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Three Months Ended June 30, 2013
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
409,077

$
—

$
409,077

Costs and Expenses
Cost of sales
—

—

297,698

—

297,698

Selling and general expenses
—

2,680

14,249

—

16,929

Other operating expense (income), net
180

(74
)
846

(661
)
291

180

2,606

312,793

(661
)
314,918

Equity in income of New Zealand joint venture
—

—

304

—

304

OPERATING (LOSS) INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
(180
)
(2,606
)
96,588

661

94,463

Gain on consolidation of New Zealand joint venture
—

—

16,098

—

16,098

OPERATING (LOSS) INCOME
(180
)
(2,606
)
112,686

661

110,561

Interest (expense) income
(3,414
)
(7,263
)
658

—

(10,019
)
Interest and miscellaneous income, net
1,759

307

532

—

2,598

Equity in income from subsidiaries
89,064

96,185

—

(185,249
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
87,229

86,623

113,876

(184,588
)
103,140

Income tax (expense) benefit
(65
)
2,441

(17,691
)
66

(15,249
)
INCOME FROM CONTINUING OPERATIONS
87,164

89,064

96,185

(184,522
)
87,891

DISCONTINUED OPERATIONS, NET

Income from discontinued operations, net of income taxes
—

—

—

—

—

NET INCOME
87,164

89,064

96,185

(184,522
)
87,891

Net income attributable to noncontrolling interest
—

—

727

—

727

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
87,164

89,064

95,458

(184,522
)
87,164

OTHER COMPREHENSIVE INCOME


Foreign currency translation adjustment
(18,625
)
(28,201
)
(18,625
)
37,250

(28,201
)
New Zealand joint venture cash flow hedges
878

221

877

(1,754
)
222

Amortization of pension and postretirement plans, net of income tax
3,717

3,718

6,831

(10,549
)
3,717

Total other comprehensive loss
(14,030
)
(24,262
)
(10,917
)
24,947

(24,262
)
COMPREHENSIVE INCOME
73,134

64,802

85,268

(159,575
)
63,629

Comprehensive loss attributable to noncontrolling interest
—

—

(9,505
)
—

(9,505
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
73,134

$
64,802

$
94,773

$
(159,575
)
$
73,134


30

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
For the Three Months Ended June 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
348,096

$
—

$
348,096

Costs and Expenses

Cost of sales
—

—

243,571

—

243,571

Selling and general expenses
—

1,904

13,988

—

15,892

Other operating income, net
—

(109
)
(5,186
)
—

(5,295
)
—

1,795

252,373

—

254,168

Equity in income of New Zealand joint venture
—

—

170

—

170

OPERATING (EXPENSE) INCOME
—

(1,795
)
95,893

—

94,098

Interest expense
(3,117
)
(10,455
)
(2,484
)
—

(16,056
)
Interest and miscellaneous income (expense), net
1,544

825

(2,285
)
—

84

Equity in income from subsidiaries
70,652

77,982

—

(148,634
)
—

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
69,079

66,557

91,124

(148,634
)
78,126

Income tax benefit (expense)
—

4,095

(16,130
)
—

(12,035
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
69,079

70,652

74,994

(148,634
)
66,091

DISCONTINUED OPERATIONS, NET


Income from discontinued operations, net of income taxes
—

—

2,988

—

2,988

NET INCOME (LOSS)
69,079

70,652

77,982

(148,634
)
69,079

OTHER COMPREHENSIVE INCOME


Foreign currency translation adjustment
(8,081
)
(8,080
)
(8,081
)
16,161

(8,081
)
New Zealand joint venture cash flow hedges
(1,998
)
(1,998
)
(1,998
)
3,996

(1,998
)
Gain from pension and postretirement plans, net of income tax
3,401

3,401

2,579

(5,980
)
3,401

Total other comprehensive loss
(6,678
)
(6,677
)
(7,500
)
14,177

(6,678
)
COMPREHENSIVE INCOME (LOSS)
$
62,401

$
63,975

$
70,482

$
(134,457
)
$
62,401



31

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

CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2013
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
802,796

$
—

$
802,796

Costs and Expenses
Cost of sales
—

—

563,716

—

563,716

Selling and general expenses
—

5,081

27,947

—

33,028

Other operating (income) expense, net
(1,701
)
449

(1,299
)
(661
)
(3,212
)
(1,701
)
5,530

590,364

(661
)
593,532

Equity in income of New Zealand joint venture
—

—

562

—

562

OPERATING INCOME BEFORE GAIN ON CONSOLIDATION OF NEW ZEALAND JOINT VENTURE
1,701

(5,530
)
212,994

661

209,826

Gain on consolidation of New Zealand joint venture
—

—

16,098

—

16,098

OPERATING INCOME (LOSS)
1,701

(5,530
)
229,092

661

225,924

Interest (expense) income
(6,689
)
(14,133
)
3,086

—

(17,736
)
Interest and miscellaneous income (expense), net
4,178

85

(1,607
)
—

2,656

Equity in income from subsidiaries
235,774

249,630

—

(485,404
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
234,964

230,052

230,571

(484,743
)
210,844

Income tax benefit (expense)
(65
)
5,722

(25,418
)
66

(19,695
)
INCOME FROM CONTINUING OPERATIONS
234,899

235,774

205,153

(484,677
)
191,149

DISCONTINUED OPERATIONS, NET
Income from discontinued operations, net of income taxes
—

—

44,477

—

44,477

NET INCOME
234,899

235,774

249,630

(484,677
)
235,626

Net income attributable to noncontrolling interest
—

—

727

—

727

NET INCOME ATTRIBUTABLE TO RAYONIER INC.
234,899

235,774

248,903

(484,677
)
234,899

OTHER COMPREHENSIVE INCOME

Foreign currency translation adjustment
(17,650
)
(27,226
)
(17,650
)
35,300

(27,226
)
New Zealand joint venture cash flow hedges
1,431

775

1,431

(2,862
)
775

Gain from pension and postretirement plans, net of income tax
8,687

8,687

6,831

(15,518
)
8,687

Total other comprehensive income
(7,532
)
(17,764
)
(9,388
)
16,920

(17,764
)
COMPREHENSIVE INCOME
227,367

218,010

240,242

(467,757
)
217,862

Comprehensive loss attributable to noncontrolling interest
—

—

(9,505
)
—

(9,505
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO RAYONIER INC.
$
227,367

$
218,010

$
249,747

$
(467,757
)
$
227,367


32

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

CONSOLIDATING STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
All Other
Subsidiaries
(Non-
guarantors)
Consolidating
Adjustments
Total
Consolidated
SALES
$
—

$
—

$
684,667

$
—

$
684,667

Costs and Expenses
Cost of sales
—

—

479,279

—

479,279

Selling and general expenses
—

5,215

29,942

—

35,157

Other operating expense (income), net
—

12

(6,445
)
—

(6,433
)
—

5,227

502,776

—

508,003

Equity in income of New Zealand joint venture
—

—

184

—

184

OPERATING (LOSS) INCOME
—

(5,227
)
182,075

—

176,848

Interest expense
(4,366
)
(20,919
)
(2,595
)
—

(27,880
)
Interest and miscellaneous income (expense), net
3,455

944

(4,339
)
—

60

Equity in income from subsidiaries
123,426

140,688

—

(264,114
)
—

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
122,515

115,486

175,141

(264,114
)
149,028

Income tax benefit (expense)
—

7,940

(38,278
)
—

(30,338
)
INCOME FROM CONTINUING OPERATIONS
122,515

123,426

136,863

(264,114
)
118,690

DISCONTINUED OPERATIONS, NET


Income from discontinued operations, net of income tax
—

—

3,825

—

3,825

NET INCOME
122,515

123,426

140,688

(264,114
)
122,515

OTHER COMPREHENSIVE INCOME
—

Foreign currency translation adjustment
(2,255
)
(2,255
)
(2,255
)
4,510

(2,255
)
New Zealand joint venture cash flow hedges
(793
)
(793
)
(793
)
1,586

(793
)
Gain from pension and postretirement plans, net of income tax
6,541

6,541

4,959

(11,500
)
6,541

Total other comprehensive income
3,493

3,493

1,911

(5,404
)
3,493

COMPREHENSIVE INCOME
$
126,008

$
126,919

$
142,599

$
(269,518
)
$
126,008


33

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

CONDENSED CONSOLIDATING BALANCE SHEETS
As of June 30, 2013
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
170,442

$
33,239

$
139,900

$
—

$
343,581

Accounts receivable, less allowance for doubtful accounts
—

907

115,631

—

116,538

Inventory
—

—

99,091

—

99,091

Deferred tax asset
—

—

55,563

—

55,563

Prepaid and other current assets
—

2,775

64,669

—

67,444

Total current assets
170,442

36,921

474,854

—

682,217

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

—

2,080,611

—

2,080,611

NET PROPERTY, PLANT AND EQUIPMENT
—

2,217

850,215

—

852,432

INVESTMENT IN JOINT VENTURE
—

—

—

—

—

INVESTMENT IN SUBSIDIARIES
1,575,156

2,627,483

—

(4,202,639
)
—

INTERCOMPANY NOTES RECEIVABLE
217,073

20,166

—

(237,239
)
—

OTHER ASSETS
3,928

34,684

174,179

—

212,791

TOTAL ASSETS
$
1,966,599

$
2,721,471

$
3,579,859

$
(4,439,878
)
$
3,828,051

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES

Accounts payable
$
—

$
1,634

$
131,621

$
—

$
133,255

Current maturities of long-term debt
75,000

—

463

—

75,463

Accrued taxes
—

2,603

17,555

—

20,158

Accrued payroll and benefits
—

10,689

9,800

—

20,489

Accrued interest
3,060

4,291

2,484

—

9,835

Accrued customer incentives
—

—

10,743

—

10,743

Other current liabilities
—

3,189

48,653

—

51,842

Current liabilities for dispositions and discontinued operations
—

—

8,686

—

8,686

Total current liabilities
78,060

22,406

230,005

—

330,471

LONG-TERM DEBT
325,000

979,511

287,323

—

1,591,834

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

69,442

—

69,442

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

130,244

28,350

—

158,594

OTHER NON-CURRENT LIABILITIES
—

13,989

13,601

—

27,590

INTERCOMPANY PAYABLE
—

165

265,823

(265,988
)
—

TOTAL RAYONIER INC. SHAREHOLDERS’ EQUITY
1,563,539

1,575,156

2,598,734

(4,173,890
)
1,563,539

Noncontrolling interest
—

—

86,581

—

86,581

TOTAL SHAREHOLDERS’ EQUITY
1,563,539

1,575,156

2,685,315

(4,173,890
)
1,650,120

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,966,599

$
2,721,471

$
3,579,859

$
(4,439,878
)
$
3,828,051


34

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, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
252,888

$
23,324

$
4,384

$
—

$
280,596

Accounts receivable, less allowance for doubtful accounts
—

386

99,973

—

100,359

Inventory
—

—

127,966

—

127,966

Deferred tax assets
—

—

15,845

—

15,845

Prepaid and other current assets
—

2,257

39,251

—

41,508

Total current assets
252,888

25,967

287,419

—

566,274

TIMBER AND TIMBERLANDS, NET OF DEPLETION AND AMORTIZATION
—

—

1,573,309

—

1,573,309

NET PROPERTY, PLANT AND EQUIPMENT
—

2,321

704,717

—

707,038

INVESTMENT IN JOINT VENTURE
—

—

72,419

—

72,419

INVESTMENT IN SUBSIDIARIES
1,445,205

2,354,270

—

(3,799,475
)
—

INTERCOMPANY NOTES RECEIVABLE
213,863

33,831

—

(247,694
)
—

OTHER ASSETS
4,148

32,961

166,802

—

203,911

TOTAL ASSETS
$
1,916,104

$
2,449,350

$
2,804,666

$
(4,047,169
)
$
3,122,951

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
$
—

$
2,132

$
68,249

$
—

$
70,381

Current maturities of long-term debt
150,000

—

—

—

150,000

Accrued taxes
—

485

13,339

—

13,824

Accrued payroll and benefits
—

15,044

13,024

—

28,068

Accrued interest
3,100

3,576

1,280

—

7,956

Accrued customer incentives
—

—

10,849

—

10,849

Other current liabilities
—

2,925

15,715

—

18,640

Current liabilities for dispositions and discontinued operations
—

—

8,105

—

8,105

Total current liabilities
153,100

24,162

130,561

—

307,823

LONG-TERM DEBT
325,000

718,321

76,731

—

1,120,052

NON-CURRENT LIABILITIES FOR DISPOSITIONS AND DISCONTINUED OPERATIONS
—

—

73,590

—

73,590

PENSION AND OTHER POSTRETIREMENT BENEFITS
—

129,156

30,426

—

159,582

OTHER NON-CURRENT LIABILITIES
—

16,432

7,468

—

23,900

INTERCOMPANY PAYABLE
—

116,074

137,797

(253,871
)
—

TOTAL SHAREHOLDERS’ EQUITY
1,438,004

1,445,205

2,348,093

(3,793,298
)
1,438,004

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
1,916,104

$
2,449,350

$
2,804,666

$
(4,047,169
)
$
3,122,951


35

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 Six Months Ended June 30, 2013
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
248,552

$
247,599

$
212,977

$
(473,456
)
$
235,672

INVESTING ACTIVITIES
Capital expenditures
—

(89
)
(94,037
)
—

(94,126
)
Purchase of additional interest in New Zealand joint venture
—

—

(139,879
)
—

(139,879
)
Purchase of timberlands
—

—

(10,447
)
—

(10,447
)
Intercompany purchase of real estate
—

—

984

(984
)
—

Jesup mill cellulose specialties expansion
—

—

(100,185
)
—

(100,185
)
Proceeds from the disposition of Wood Products business
—

—

72,953

—

72,953

Change in restricted cash
—

—

7,603

—

7,603

Investment in Subsidiaries
(138,178
)
(387,659
)
—

525,837

—

Other
—

1,700

18,376

—

20,076

CASH (USED FOR) INVESTING ACTIVITIES
(138,178
)
(386,048
)
(244,632
)
524,853

(244,005
)
FINANCING ACTIVITIES

Issuance of debt
175,000

280,000

—

—

455,000

Repayment of debt
(250,000
)
(23,087
)
—

—

(273,087
)
Dividends paid
(113,222
)
—

—

—

(113,222
)
Proceeds from the issuance of common shares
6,643

—

—

—

6,643

Excess tax benefits on stock-based compensation
—

—

7,399

—

7,399

Debt issuance costs
—

—

—

—

—

Repurchase of common shares
(11,241
)
—

—

—

(11,241
)
Issuance of intercompany notes
—

—

—

—

—

Intercompany distributions
—

(108,549
)
159,946

(51,397
)
—

CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(192,820
)
148,364

167,345

(51,397
)
71,492

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

(174
)
—

(174
)
CASH AND CASH EQUIVALENTS

Change in cash and cash equivalents
(82,446
)
9,915

135,516

—

62,985

Balance, beginning of year
252,888

23,324

4,384

—

280,596

Balance, end of period
$
170,442

$
33,239

$
139,900

$
—

$
343,581


36

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 Six Months Ended June 30, 2012
Rayonier Inc.
(Parent
Issuer)
Subsidiary Guarantors
Non-
guarantors
Consolidating
Adjustments
Total
Consolidated
CASH PROVIDED BY OPERATING ACTIVITIES
$
3,173

$
54,346

$
181,124

$
(29,767
)
$
208,876

INVESTING ACTIVITIES
Capital expenditures
—

(165
)
(76,081
)
—

(76,246
)
Purchase of timberlands
—

—

(8,687
)
—

(8,687
)
Jesup mill cellulose specialties expansion
—

—

(63,998
)
—

(63,998
)
Change in restricted cash
—

—

(14,427
)
—

(14,427
)
Investment in Subsidiaries
(5,181
)
(39,436
)
—

44,617

—

Other
—

(69
)
(635
)
—

(704
)
CASH (USED FOR) INVESTING ACTIVITIES
(5,181
)
(39,670
)
(163,828
)
44,617

(164,062
)
FINANCING ACTIVITIES
Issuance of debt
325,000

15,000

15,000

—

355,000

Repayment of debt
(120,000
)
(53,110
)
(15,000
)
—

(188,110
)
Dividends paid
(98,201
)
—

—

—

(98,201
)
Proceeds from the issuance of common shares
3,980

—

—

—

3,980

Excess tax benefits on stock-based compensation
—

—

4,234

—

4,234

Debt issuance costs
(3,653
)
—

—

—

(3,653
)
Repurchase of common shares
(7,783
)
—

—

—

(7,783
)
Intercompany distributions
—

5,181

9,669

(14,850
)
—

CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
99,343

(32,929
)
13,903

(14,850
)
65,467

EFFECT OF EXCHANGE RATE CHANGES ON CASH
—

—

219

—

219

CASH AND CASH EQUIVALENTS
Change in cash and cash equivalents
97,335

(18,253
)
31,418

—

110,500

Balance, beginning of year
—

68,953

9,650

—

78,603

Balance, end of period
$
97,335

$
50,700

$
41,068

$
—

$
189,103



37




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “we,” “us,” “our,” “the Company,” or “Rayonier,” we mean Rayonier Inc. and its consolidated subsidiaries. References herein to “Notes to Financial Statements” refer to the Notes to the Consolidated Financial Statements of Rayonier Inc. included in Item 1 of this Report.
The Management’s Discussion and Analysis of Financial Condition and Results of Operations (“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 the 2012 Annual Report on Form 10-K and information contained in our subsequent Forms 10-Q, 8-K, and other reports to the SEC.
Forward-Looking Statements
Certain statements in this document regarding anticipated financial outcomes including earnings guidance, if any, business and market conditions, outlook 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,” “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 our 2012 Annual Report on Form 10-K, 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 further disclosures we make on related subjects in our subsequent Forms 10-Q, 10-K, 8-K and other reports to the SEC.
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.

Derivatives and Hedging
We use derivatives to manage a variety of risks, including risks related to interest rates, foreign exchange and commodity prices. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly may result in volatility in reported earnings.
In evaluating whether a particular relationship qualifies for hedge accounting, we test effectiveness at inception. Quarterly, we evaluate ongoing effectiveness by determining whether changes in the fair value of the derivative offset, within a specified range, changes in the fair value of the hedged item. If not, we discontinue applying hedge accounting to that relationship prospectively. Fair values of derivative instruments are calculated using valuation models incorporating market-based assumptions including deposit/swap rates (for interest rate swaps), foreign exchange spot rates and foreign exchange ticks (for foreign currency forwards).
We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in our income statement. We do not use derivative instruments for trading or speculative purposes. We perform assessments of our counterparty credit risk regularly, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on our most recent assessment of our counterparty credit risk, we consider this risk to be low. In addition, we enter into derivative contracts with a variety of financial institutions that we believe are creditworthy in order to reduce our concentration of credit risk.

At June 30, 2013, derivative assets and liabilities were $69 thousand and $11.1 million , respectively. See Note 9 — Derivative Financial Instruments and Hedging Activities for additional information about our use of derivatives.


38


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 2012 Annual Report on Form 10-K.
Segments
We are a leading international forest products company primarily engaged in timberland management, the sale of real estate, and the production and sale of high-value specialty cellulose fibers and fluff pulp. We operate in three reportable business segments: Forest Resources, Real Estate and Performance Fibers. Prior to the first quarter of 2013, the Company operated in four reportable business segments, which included Wood Products. In March 2013, the Company sold its Wood Products business and its operations are shown as discontinued operations for all periods presented. See Note 2 — Sale of Wood Products Business for additional information. In April 2013, the Company purchased an additional 39 percent interest in Matariki Forestry Group, a joint venture (“JV”) that owns or leases approximately 0.3 million acres of New Zealand timberlands. As a result of the acquisition, Rayonier is a 65 percent owner of the JV and the results of its operations have been included within the Forest Resources segment, in the Company’s consolidated financial statements. See Note 6 — Joint Venture Investment for additional information.
Forest Resources sales include all activities which relate to the harvesting of timber. Real Estate sales include all property sales, including those designated for higher and better use (“HBU”). The assets of the Real Estate segment include HBU property held by our real estate subsidiary, TerraPointe LLC. The Performance Fibers segment includes two major product lines, cellulose specialties and absorbent materials. Our remaining operations include harvesting and selling timber acquired from third parties (log trading). These operations are combined and reported in “Other Operations.” Sales between operating segments are made based on estimated fair market value, and intercompany sales, purchases and profits or losses are eliminated in consolidation.
We evaluate financial performance based on the operating income of the segments. Operating income, as presented in the Consolidated Statements of Income and Comprehensive Income, is equal to segment income (loss). 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.


39


Results of Operations

Three Months Ended June 30,
Six Months Ended June 30,
Financial Information (in millions)
2013
2012
2013
2012
Sales
Forest Resources
Atlantic
$
19

$
16

$
37

$
31

Gulf States
13

9

25

19

Northern
30

26

54

50

New Zealand
47

2

50

5

Total Forest Resources
109

53

166

105

Real Estate
Development
—

—

2

—

Rural
9

11

11

23

Non-Strategic Timberlands
4

1

25

1

Total Real Estate
13

12

38

24

Performance Fibers
Cellulose specialties
233

220

480

432

Absorbent materials
20

35

57

73

Total Performance Fibers
253

255

537

505

Other Operations
34

28

62

51

Total Sales
$
409

$
348

$
803

$
685

Operating Income (Loss)
Forest Resources
$
21

$
8

$
34

$
16

Real Estate
6

6

23

12

Performance Fibers
79

84

171

164

Other Operations
2

1

2

—

Corporate and other (a)
3

(5
)
(4
)
(15
)
Operating Income
111

94

226

177

Interest Expense, Interest Income and Other
(8
)
(16
)
(15
)
(28
)
Income Tax Expense
(15
)
(12
)
(20
)
(30
)
Income from Continuing Operations
$
88

$
66

$
191

$
119

Discontinued Operations, Net
—

3

45

4

Net Income
$
88

$
69

$
236

$
123

Net income Attributable to Noncontrolling Interest
(1
)
—

(1
)
—

Net Income Attributable to Rayonier Inc.
$
87

$
69

$
235

$
123

Diluted Earnings Per Share Attributable to Rayonier Inc.
Continuing Operations
$
0.67

$
0.52

$
1.46

$
0.93

Discontinued Operations
—

0.02

0.34

0.03

Net Income
$
0.67

$
0.54

$
1.80

$
0.96

(a) The three and six months ended June 30, 2013 included a $16.1 million gain related to the consolidation of the New Zealand joint venture.


40


FOREST RESOURCES
Sales (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/
Mix/Other
Atlantic
$
16

$
1

$
2

$
19

Gulf States
9

—

4

13

Northern
26

5

(1
)
30

New Zealand
2

—

45

47

Total Sales
$
53

$
6

$
50

$
109

Sales (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/
Mix/Other
Atlantic
$
31

$
3

$
3

$
37

Gulf States
19

2

4

25

Northern
50

6

(2
)
54

New Zealand
5

—

45

50

Total Sales
$
105

$
11

$
50

$
166


Operating Income (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/
Mix
Cost/Other
Atlantic
$
2

$
1

$
—

$
2

$
5

Gulf States
2

—

1

—

3

Northern
4

5

2

(1
)
10

New Zealand/Other
—

—

—

3

3

Total Operating Income
$
8

$
6

$
3

$
4

$
21

Operating Income (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/
Mix
Cost/Other
Atlantic
$
5

$
3

$
1

$
1

$
10

Gulf States
2

2

1

—

5

Northern
8

6

3

(2
)
15

New Zealand/Other
1

—

—

3

4

Total Operating Income
$
16

$
11

$
5

$
2

$
34

In the Atlantic region, both sales and operating income increased for the three and six months ended June 30, 2013 as compared to prior year periods. The increases were driven by higher pulpwood and sawlog demand and wet weather conditions restricting supply.
The Gulf region’s sales and operating income for the 2013 periods also improved over 2012 primarily due to higher sawlog demand and increased volumes as a result of our Texas acquisition at the end of 2012. These increases were partially offset by lower non-timber income.
In the Northern region, improved domestic and export demand led to 13 percent and 10 percent price increases in the second quarter and year-to-date 2013 periods compared to prior year periods, respectively. The improved demand also drove volume increases of 20 percent and 11 percent comparing the same periods. Both 2013 periods were also impacted by higher logging costs.
In April 2013, we acquired an additional 39 percent ownership interest in our New Zealand JV for $140 million. As a 65 percent owner, we consolidated 100 percent of the JV’s results of operations for the first time during the second quarter of 2013. Higher sales and operating results for the three and six months ended June 30, 2013 over the prior year periods reflect our increased ownership.

41


REAL ESTATE
Our real estate holdings are primarily in the southeastern U.S. We segregate these real estate holdings into three groups: development HBU, rural HBU and non-strategic timberlands. Our strategy is to extract maximum value from our HBU properties while selling non-strategic holdings to reinvest in more strategic properties.
Sales (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/Mix
Development
$
—

$
—

$
—

$
—

Rural
11

(2
)
—

9

Non-Strategic Timberlands
1

1

2

4

Total Sales
$
12

$
(1
)
$
2

$
13

Sales (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/Mix
Development
$
—

$
1

$
1

$
2

Rural
23

(1
)
(11
)
11

Non-Strategic Timberlands
1

13

11

25

Total Sales
$
24

$
13

$
1

$
38


Operating Income (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/Mix
Total Operating Income
$
6

$
(1
)
$
1

$
6

Operating Income (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/Mix
Total Operating Income
$
12

$
13

$
(2
)
$
23

Second quarter sales of $13 million were slightly higher than the prior year period, while operating income of $6 million was consistent with 2012. Year-to-date, sales were $14 million higher than 2012 and operating income was $11 million above the prior year as higher non-strategic prices and volumes more than offset lower rural prices (due to mix) and volumes.
PERFORMANCE FIBERS
Sales (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/
Mix
Cellulose specialties
$
220

$
1

$
12

$
233

Absorbent materials
35

(2
)
(13
)
20

Total Sales
$
255

$
(1
)
$
(1
)
$
253

Sales (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/
Mix
Cellulose specialties
$
432

$
9

$
39

$
480

Absorbent materials
73

(7
)
(9
)
57

Total Sales
$
505

$
2

$
30

$
537

Cellulose specialties prices improved in 2013 versus the prior year periods while volumes increased 5 percent and 9 percent for the quarter and year-to-date, respectively, due to the timing of customer orders. Absorbent materials sales decreased from the prior year periods as prices declined 10 percent and 11 percent, reflecting weakness in that market. Volumes dropped 37 percent for the quarter and 13 percent year-to-date, as we exit the absorbent materials business in conjunction with our CSE project.

42


Operating Income (in millions)
2012
Changes Attributable to:
2013
Three Months Ended June 30,
Price
Volume/
Mix
Cost/Other
Total Operating Income
$
84

$
(1
)
$
5

$
(9
)
$
79

Operating Income (in millions)
2012
Changes Attributable to:
2013
Six Months Ended June 30,
Price
Volume/
Mix
Cost/Other
Total Operating Income
$
164

$
2

$
15

$
(10
)
$
171

Operating income declined $5 million for the three months ended June 30, 2013 primarily due to higher wood and chemical prices and production costs. Year-to-date operating income was $7 million above prior year as higher cellulose specialties prices and volumes more than offset lower absorbent materials results and increased costs.
During the second quarter, we reached an important milestone by the on time start-up of the cellulose specialties expansion (“CSE”) project at our Jesup mill,with total project cost expected to be in the range of $375 million to $390 million. We plan on exiting the commodity absorbent materials business completely and moving to producing only cellulose specialties. Initially, we plan to produce commodity viscose as we commence customer qualifications for cellulose specialties from the converted line. As we complete customer qualifications and transition from producing commodity viscose to cellulose specialties, phased-in production of cellulose specialties from the CSE is expected to be 5,000 to 20,000 tons in 2013 and 90,000 to 100,000 tons in 2014. We expect to reach the full production rate of 190,000 tons of new cellulose specialties capacity in 2016. As production of cellulose specialties increases, we anticipate total sales and operating income to increase as higher prices received on the additional cellulose specialties volumes more than offset expected cost increases of approximately 11 percent for 2013 and the net 70,000 metric ton reduction in overall production capacity. For the quarter ended June 30, 2013, our cellulose specialties average sales price of $1,902 per metric ton was $1,258 above our absorbent materials average sales price per metric ton. We expect our costs to increase during the CSE phase-in due to start-up and higher conversion costs and depreciation expense.
OTHER OPERATIONS
Sales from our New Zealand log trading business increased $6 million and $11 million in 2013 over the prior year three and six month periods, respectively, due to increased Asian demand. Operating income increased $1 million and $2 million over the three and six months ended June 30, 2012, primarily due to foreign currency exchange gains.
Corporate and Other Expense/Eliminations
Corporate and other expenses for second quarter 2013 decreased $8 million and $11 million from the respective prior year quarter and year-to-date periods. The decreases were primarily due to the $16 million gain related to the consolidation of the New Zealand JV. The gain includes the recognition of a $10.1 million deferred gain based on the original sale of our New Zealand operations to the JV in 2005 and a $6 million benefit due to the required fair market value remeasurement of our equity interest in the JV held before the purchase of the additional interest. Excluding the gain related to the consolidation of the New Zealand JV, corporate and other expenses increased due to higher legal, compensation and corporate development costs in the second quarter and increased legal costs in the year-to-date period. The prior year periods also benefited from a $2 million insurance recovery.
Interest Expense/Income and Income Tax Expense
Interest and other expenses were $8 million and $13 million below the three and six month periods ended June 30, 2012, respectively. The decline in interest expense was primarily due to lower borrowing rates and higher capitalized interest related to the CSE project. Additionally, second quarter 2012 included a $3 million interest accrual related to the alternative fuel mixture (“AFMC”) for cellulosic biofuel producer credit (“CBPC”) exchange.
The June 30, 2013 effective tax rates before discrete items were 20.7 percent and 21.9 percent for the quarter and year-to-date periods. The effective tax rates for the comparable 2012 periods were 26.3 percent and 26.4 percent , respectively. The decrease in the quarter and year-to-date effective tax rates was primarily due to proportionally higher REIT operating results in 2013. Including discrete items, primarily the AFMC for CBPC exchanges, the effective tax rates were 14.8 percent and 9.3 percent for the three and six months ended June 30, 2013, respectively, and 15.4 percent and 20.4 percent for the comparable 2012 periods. See Note 4 — Income Taxes for additional information.



43


Outlook
In Forest Resources, sawlog demand and prices are benefiting from the early stages of a gradually improving housing market, and Asian demand for sawlogs from our US Northwest and New Zealand timberlands remains strong. In Real Estate, we are seeing increased interest in our development properties and demand for our nonstrategic timberlands. In this transition year for Performance Fibers, we recently reached an important milestone by the on time start-up of the CSE project at our Jesup mill. Early production volumes and quality results have exceeded our expectations. We will begin qualifying production from the converted line with cellulose specialties customers in the third quarter.
Consistent with our earlier guidance, we expect earnings from continuing operations to be weighted more heavily to the first half of the year with the benefit of tax credits recognized in the first quarter and the impact of the CSE project phase-in on the second half. Overall, excluding the results of the Wood Products business and gain on sale, and the gain related to consolidation of our New Zealand JV, we expect 2013 operating income to be slightly above 2012, and 2013 EPS to be moderately above 2012 reflecting lower income tax and interest expenses.
Our full year 2013 financial guidance is subject to a number of variables and uncertainties, including those discussed under Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Forward-Looking Statements of this Form 10-Q and Item 1A — Risk Factors in our 2012 Annual Report on Form 10-K.
Employee Relations
On June 30, 2012, collective bargaining agreements covering approximately 700 hourly employees at our Jesup mill expired. Negotiations were successfully concluded on March 28, 2013, and the unions ratified a new agreement on April 12, 2013 that will expire on June 30, 2017. See Item 1 — Business and Item 1A — Risk Factors in our 2012 Annual Report on Form 10-K for additional information on employee relations.

Liquidity and Capital Resources
Our operations have generally produced consistent cash flows and required limited capital resources. Short-term borrowings have helped fund cyclicality in working capital needs and long-term debt has been used to fund major acquisitions and strategic projects.
Summary of Liquidity and Financing Commitments (in millions of dollars)
June 30,
December 31,
2013
2012
Cash and cash equivalents (a)
$
344

$
281

Total debt
1,667

1,270

Shareholders’ equity
1,650

1,438

Total capitalization (total debt plus equity)
3,317

2,708

Debt to capital ratio
50
%
47
%
(a) Cash and cash equivalents consisted primarily of time deposits with original maturities of 90 days or less.
Cash Flows (in millions of dollars)
The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30 :
2013
2012
Cash provided by (used for):
Operating activities
$
236

$
209

Investing activities
(244
)
(164
)
Financing activities
71

65

Cash Provided by Operating Activities
Cash provided by operating activities increased primarily due to stronger operating results across all segments. Partially offsetting these results was the Company’s election to pay $70 million to exchange the AFMC for the CBPC. This resulted in a $19 million discrete tax benefit in 2013 reflecting reduced future tax payments of $89 million, including approximately $60 million realized during 2013 and $29 million expected to be realized in the first half of 2014.

44


Cash Used for Investing Activities
Cash used for investing activities increased mainly due to the purchase of an additional 39 percent interest in the New Zealand JV for $140 million and higher capital expenditures including the CSE project. This spending was partially offset by net proceeds of $73 million from the sale of our Wood Products business and a change in restricted cash due to the timing of like-kind exchanges.
Cash Provided by Financing Activities
Cash provided by financing activities increased primarily due to net borrowings of $182 million through the second quarter of 2013 versus net borrowings of $167 million in the prior year period.
Expected 2013 Expenditures
Capital expenditures in 2013 are forecasted between $155 million and $165 million, excluding strategic timberland acquisitions, the CSE project and the purchase of the additional interest in our New Zealand JV. We spent $100 million through the second quarter of 2013 on the CSE project and expect total 2013 CSE spending to range between $130 million and $145 million. Annual dividend payments are expected to increase from $207 million in 2012 to $237 million in 2013 including the recent increase in the quarterly dividend rate from 44 cents to 49 cents per share effective with the third quarter payment.
We have no mandatory pension contributions in 2013 but may make discretionary contributions. Cash payments for income taxes in 2013 are anticipated to be between $75 million and $80 million, excluding taxes related to the gain on the Wood Products sale. Expenditures for environmental costs related to our dispositions and discontinued operations are expected to be $8 million. See Note 13 — Liabilities for Dispositions and Discontinued Operations for further information .

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: Earnings before Interest, Taxes, Depreciation, Depletion and Amortization (“EBITDA”), and Adjusted Cash Available for Distribution (“Adjusted CAD”). These measures are not defined by Generally Accepted Accounting Principles (“GAAP”) and the discussion of EBITDA and Adjusted CAD is not intended to conflict with or change any of the GAAP disclosures described above. Management considers these measures to be important to estimate the enterprise and shareholder values of the Company as a whole and of its core segments, and for allocating capital resources. In addition, analysts, investors and creditors use these measures when analyzing our operating performance, financial condition and cash generating ability. Management uses EBITDA as a performance measure and Adjusted CAD as a liquidity measure. EBITDA is defined by the Securities and Exchange Commission. Adjusted CAD as defined, however, may not be comparable to similarly titled measures reported by other companies.
We reconcile EBITDA to Net Income for the consolidated Company and Operating Income for the Segments, as those are the nearest GAAP measures for each. Below is a reconciliation of Net Income to EBITDA for the respective periods (in millions of dollars):
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Net Income to EBITDA Reconciliation
Net Income
$
88

$
69

$
236

$
123

Interest, net
8

16

15

28

Income tax expense, continuing operations
15

12

20

30

Income tax expense, discontinued operations
—

2

22

2

Depreciation, depletion and amortization
44

34

80

64

Depreciation, depletion and amortization from discontinued operations
—

1

1

2

EBITDA
$
155

$
134

$
374

$
249


45


EBITDA by segment is a critical valuation measure used by our Chief Operating Decision Maker, existing shareholders and potential shareholders to measure how the Company is performing relative to the assets under management. EBITDA by segment for the respective periods was as follows (millions of dollars):
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
EBITDA by Segment
Forest Resources
$
49

$
25

$
78

$
50

Real Estate
8

8

29

15

Performance Fibers
93

99

200

190

Other Operations
2

1

2

—

Corporate and other
3

1

65

(6
)
EBITDA
$
155

$
134

$
374

$
249

Second quarter 2013 Corporate and other includes a $16 million gain related to the consolidation of the New Zealand JV. Six months ended 2013 results include a $64 million gain on the sale of Wood Products and the $16 million gain related to the consolidation of the New Zealand JV. For the six months ended June 30, 2013 , consolidated EBITDA was above the prior year period primarily due to these items as well as higher operating results.
The following tables reconcile Operating Income by segment to EBITDA by segment (millions of dollars):
Forest Resources
Real Estate
Performance Fibers
Other Operations
Corporate and Other
Total
Three Months Ended June 30, 2013
Operating Income
$
21

$
6

$
79

$
2

$
3

$
111

Add: Depreciation, depletion and amortization
28

2

14

—

—

44

Add: Income from discontinued operations
—

—

—

—

—

—

Add: Depreciation, depletion and amortization from discontinued operations
—

—

—

—

—

—

EBITDA
$
49

$
8

$
93

$
2

$
3

$
155

Three Months Ended June 30, 2012
Operating Income
$
8

$
6

$
84

$
1

$
(5
)
$
94

Add: Depreciation, depletion and amortization
17

2

15

—

—

34

Add: Income from discontinued operations
—

—

—

—

5

5

Add: Depreciation, depletion and amortization from discontinued operations
—

—

—

—

1

1

EBITDA
$
25

$
8

$
99

$
1

$
1

$
134

Six Months Ended June 30, 2013
Operating Income
$
34

$
23

$
171

$
2

$
(4
)
$
226

Add: Depreciation, depletion and amortization
44

6

29

—

1

80

Add: Income from discontinued operations
—

—

—

—

67

67

Add: Depreciation, depletion and amortization from discontinued operations
—

—

—

—

1

1

EBITDA
$
78

$
29

$
200

$
2

$
65

$
374

Six Months Ended June 30, 2012
Operating Income
$
16

$
12

$
164

$
—

$
(15
)
$
177

Add: Depreciation, depletion and amortization
34

3

26

—

1

64

Add: Income from discontinued operations
—

—

—

—

6

6

Add: Depreciation, depletion and amortization from discontinued operations
—

—

—

—

2

2

EBITDA
$
50

$
15

$
190

$
—

$
(6
)
$
249

Adjusted CAD is a non-GAAP measure of cash generated during a period which 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, the change in committed cash, and other items which include cash provided by discontinued operations, excess tax benefits on stock-based compensation and the change in capital expenditures purchased on

46


account. Committed cash represents outstanding checks that have been drawn on our zero balance bank accounts but have not been paid. In compliance with SEC requirements for non-GAAP measures, we reduce CAD by mandatory debt repayments which results in the measure entitled “Adjusted CAD.”
Below is a reconciliation of Cash Provided by Operating Activities to Adjusted CAD (in millions of dollars):
Six Months Ended June 30,
2013
2012
Cash provided by operating activities
$
236

$
209

Capital expenditures (a)
(94
)
(76
)
Change in committed cash
—

3

Excess tax benefits on stock-based compensation
7

4

Other
21

1

CAD
170

141

Mandatory debt repayments
—

(23
)
Adjusted CAD
$
170

$
118

Cash used for investing activities
$
(244
)
$
(164
)
Cash provided by financing activities
$
71

$
65

(a)
Capital expenditures exclude strategic capital. Strategic capital totaled $114 million for the CSE, $140 million for the New Zealand acquisition and $10 million for timberland acquisitions for the six months ended June 30, 2013 . Strategic capital totaled $73 million for the CSE and $9 million for timberland acquisitions for the six months ended June 30, 2012 .
Adjusted CAD was higher in 2013 primarily due to favorable operating results and lower working capital requirements due to the timing of accounts payable payments, partially offset by a $70 million tax payment to exchange AFMC for CBPC. Adjusted CAD generated in any period is not necessarily indicative of the amounts that may be generated in future periods.
Liquidity Facilities
During the six months ended June 30, 2013 , we made net repayments of $15 million on our $450 million unsecured revolving credit facility. The Company had $187 million of available borrowings under this facility at June 30, 2013 . We also borrowed an additional $200 million on our term credit agreement for general corporate purposes.
As of March 31, 2013, our $172.5 million 4.50% Senior Exchangeable Notes due 2015 became exchangeable at the option of the holders for the calendar quarter ending June 30, 2013. Per the indenture, in order for the notes to become exchangeable, the Company’s stock price must exceed 130 percent of the exchange price for 20 trading days in a period of 30 consecutive trading days as of the last day of the quarter. During the quarter ended June 30, 2013 , the note holders did not elect to exercise the exchange option. These notes are also exchangeable in the third quarter based upon the average stock price for the 30 trading days ending June 30, 2013 . If the note holders exercise their options prior to September 30, 2013, the Company intends to repay the principal of the notes by accessing its revolving credit facility. Any excess exchange value will be settled at the option of the Company in either cash or stock of Rayonier.
In connection with our installment note, term credit agreement and credit facility, covenants must be met, including ratios based on the covenant definition of EBITDA, ratios based on consolidated funded debt compared to consolidated net worth, ratios of subsidiary debt to consolidated net tangible assets and ratios of cash flows to fixed charges. Covenants must also be met in connection with the New Zealand JV’s credit facility, including ratios of debt to forestry and land valuations and ratios of operating cash flows to financing costs. At June 30, 2013 , we are in compliance with all of these covenants. In addition to these financial covenants, the installment note, mortgage note, term credit agreement and revolving credit facility include customary covenants that limit the incurrence of debt and the disposition of assets, among others.


47


Contractual Financial Obligations and Off-Balance Sheet Arrangements

The following table updates our contractual financial obligations and anticipated cash spending related to the New Zealand JV, which has been consolidated as a result of our acquisition of a controlling interest:
Contractual Financial Obligations (in millions)
Total
Payments Due by Period
Remaining 2013
2014-2015
2016-2017
Thereafter
Long-term debt (a)
$
181

$
—

$
123

$
58

$
—

Interest payments on long-term debt (b)
13

3

8

2

—

Operating leases — timberland
105

1

5

5

94

Purchase obligations (c)
11

1

1

1

8

Total contractual cash obligations
$
310

$
5

$
137

$
66

$
102

(a)
Contractual payments were calculated based on outstanding principal amounts and maturity dates as of June 30, 2013. The maturity dates changed in July 2013 due to the amendment of the Senior Secured Revolving Credit Agreement. See Note 16 — Debt for additional information on this subsequent event.
(b)
Projected interest payments for variable-rate debt were calculated based on outstanding principal amounts and interest rates as of June 30, 2013. For changes made in conjunction with the subsequent refinancing, see Note 16 — Debt .
(c)
Purchase obligations represent derivative instruments held. See Note 9 — Derivative Financial Instruments and Hedging Activities .
Excluding the New Zealand JV obligations outlined above, we have no material changes to the Contractual Financial Obligations table as presented in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2012 Annual Report on Form 10-K. See Note 11 — Guarantees for details on the letters of credit, surety bonds and guarantees as of June 30, 2013 .
Sales Volumes by Segment:
Three Months Ended June 30,
Six Months Ended June 30,
2013
2012
2013
2012
Forest Resources — in thousands of short green tons
Atlantic
904

823

1,772

1,560

Gulf States
514

403

923

845

Northern
512

426

967

868

New Zealand
601

—

601

—

Total
2,531

1,652

4,263

3,273

Real Estate — in acres
Development
47

15

133

35

Rural
3,831

4,036

5,006

9,488

Non-Strategic Timberlands
3,372

717

8,947

956

Total
7,250

4,768

14,086

10,479

Performance Fibers
Sales volume — in thousands of metric tons
Cellulose specialties
123

116

255

234

Absorbent materials
29

46

85

97

Total
152

162

340

331



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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.
Cyclical pricing of commodity market paper pulp is one of the factors which influences Performance Fibers’ prices in the absorbent materials product line. However, as a non-integrated producer of absorbent materials, primarily fluff pulp, for non-papermaking end uses, our absorbent material pricing tends to lag (on both the upturn and downturn) commodity paper pulp prices with pricing adjustments that are less severe. Our cellulose specialty products’ prices are based on market supply and demand and are not correlated to commodity paper pulp prices. In addition, a majority of our cellulose specialty products are under long-term volume contracts that extend through 2013 to 2017.
As of June 30, 2013 we had $881 million of long-term variable rate debt which is subject to interest rate risk. At this borrowing level, a hypothetical one-percentage point increase/decrease in interest rates would result in a corresponding increase/decrease of approximately $8.8 million in interest payments and expense over a 12 month period. Our primary interest rate exposure on variable rate debt results from changes in LIBOR and the New Zealand 90 day bank bill rate. The Company’s New Zealand JV uses interest rate swaps to manage its exposure to interest rate movements on its bank loan by swapping a portion of these borrowings from floating rates to fixed rates.The notional amounts of the outstanding interest rate swap contracts at June 30, 2013 were $172.5 million. The interest rate swap contracts have maturities between one and ten years.
The fair market value of our long-term fixed interest rate debt is also subject to interest rate risk. However, we intend to hold most of our debt until maturity. The estimated fair value of our fixed-rate debt at June 30, 2013 was $837 million compared to $713 million in carrying value. 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 June 30, 2013 would result in a corresponding decrease/increase in the fair value of our fixed-rate debt of approximately $35 million.
We periodically enter into commodity forward contracts to fix some of our fuel oil, diesel and natural gas costs. The forward contracts partially mitigate the risk of a change in Performance Fibers and the New Zealand JV’s margins resulting from an increase or decrease in these energy costs. At June 30, 2013 , the notional amount of our outstanding diesel contracts was 40 thousand barrels.
The functional currency of the Company’s New Zealand-based operations and 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 JV routinely enters into foreign currency exchange contracts and foreign currency option contracts to hedge a portion of the JV’s foreign exchange exposure. At June 30, 2013, the JV had foreign currency exchange contracts with a notional amount of $26 million and foreign currency option contracts with a notional amount of $56 million outstanding.

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 June 30, 2013 .

49


In the quarter ended June 30, 2013 , 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.



50


PART II.    OTHER INFORMATION


Item 6. Exhibits
10.1

Summary of Bonus Award to Charles Margiotta
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 June 30, 2013, formatted in Extensible Business Reporting Language (“XBRL”), includes: (i) the Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2013 and 2012; (ii) the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012 (iii) the Consolidated Statements of Cash Flows for the Six Months Ended June, 2013 and 2012; and (iv) the Notes to Consolidated Financial Statements


Filed herewith

51


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 / HANS E. VANDEN NOORT
Hans E. Vanden Noort
Senior Vice President, Chief Financial Officer and Treasurer
(Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)
Date: July 26, 2013





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