DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company’s New Zealand JV uses derivative financial instruments to mitigate the financial impact of exposure to these risks. The Company also uses derivative financial instruments to mitigate exposure to foreign currency risk due to the translation of the investment in Rayonier’s New Zealand-based operations from New Zealand dollars to U.S. dollars.

Accounting for derivative financial instruments is governed by Accounting Standards Codification Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in New Zealand is partially or completely liquidated. 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. The Company’s hedge ineffectiveness was immaterial for all periods presented.

Foreign Currency Exchange and Option Contracts

The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited (“RNZ”) and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The timber operations of the New Zealand JV are typically hedged 50 percent to 90 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50 percent to 75 percent of forecasted sales and purchases for the forward three to 12 months and up to 50 percent of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of June 30, 2015, foreign currency exchange contracts and foreign currency option contracts had maturity dates through December 2016.

Foreign currency exchange and option contracts hedging foreign currency risk on export sales and ocean freight payments that were entered into subsequent to the Company’s acquisition of a majority interest in the New Zealand JV qualify for cash flow hedge accounting. The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black-Scholes option pricing model.

In December 2014, the Company entered into a foreign currency exchange contract to mitigate the risk of fluctuations in foreign currency exchange rates when translating RNZ’s balance sheet to U.S. dollars. This contract hedges a portion of the Company’s net investment in New Zealand and qualifies as a net investment hedge. The fair value of the foreign currency exchange contract 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 ineffectiveness of the foreign currency exchange contract is measured using the spot rate method, whereby the change in the fair value of the contract, other than the change attributable to movements in the spot rate, is excluded from the measure of hedge ineffectiveness and is reported directly in earnings. The Company does not expect any ineffectiveness or changes other than those attributable to movements in the spot rate as the critical risks of the forward contract and the net investment in RNZ coincide. This foreign currency exchange contract matures on December 21, 2015.

Interest Rate Swaps

The Company uses interest rate swaps to manage the New Zealand JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. 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, 2015, the Company’s interest rate contracts hedged 81 percent of the New Zealand JV’s variable rate debt and had maturity dates through January 2020.

See Note 15 — Debt for discussion of debt refinancing and planned recapitalization of the Company’s New Zealand joint venture subsequent to June 30, 2015.

Fuel Hedge Contracts

The Company has historically used fuel hedge contracts to manage its New Zealand JV’s exposure to changes in New Zealand’s domestic diesel prices. Due to the low volume of diesel fuel purchases made by the New Zealand JV in 2013, the Company decided to no longer hedge its diesel fuel purchases effective November 2013. There were no contracts remaining as of December 31, 2014.    

The following table demonstrates the impact of the Company’s derivatives on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the six months ended June 30, 2015 and 2014.

		Three Months Ended June 30,
	Income Statement Location	2015			2014
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive (loss) income		($1,621	)		($818	)
Foreign currency option contracts	Other comprehensive (loss) income	(2,658		)	(504		)
Derivative designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive (loss) income		$2,173		—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating (income) expense	—			—
Foreign currency option contracts	Other operating (income) expense	546			—
Interest rate swaps	Interest income and miscellaneous expense, net	(1,417		)	(729		)
Fuel hedge contracts	Cost of sales (benefit)	—			(92		)

		Six Months Ended June 30,
	Income Statement Location	2015			2014
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive (loss) income		($2,308	)		$669
Foreign currency option contracts	Other comprehensive (loss) income	(3,339		)	221
Derivative designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive (loss) income	3,107			—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating (income) expense	—			25
Foreign currency option contracts	Other operating (income) expense	546			7
Interest rate swaps	Interest and miscellaneous (expense) income, net	(3,273		)	(1,862		)
Fuel hedge contracts	Cost of sales (benefit)	—			225

During the next 12 months, the amount of the June 30, 2015 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 $4.1 million.

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Notional Amount
	June 30, 2015		December 31, 2014
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts		$28,200		$28,540
Foreign currency option contracts	135,700		79,400
Derivative designated as a net investment hedge:
Foreign currency exchange contract	23,828		27,419
Derivatives not designated as hedging instruments:
Interest rate swaps	129,352		161,968

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Location on Balance Sheet	Fair Value Assets / (Liabilities) (a)
		June 30, 2015			December 31, 2014
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Prepaid and other current assets	—				$132
	Other assets	—			59
	Other current liabilities	(2,197		)	(272		)
	Other non-current liabilities	(639		)	—
Foreign currency option contracts	Prepaid and other current assets	—			299
	Other assets	—			198
	Other current liabilities	(3,614		)	(1,439		)
	Other non-current liabilities	(653		)	(196		)
Derivative designated as a net investment hedge:
Foreign currency exchange contract	Prepaid and other current assets	2,884			—
	Other current liabilities	—			(223		)
Derivatives not designated as hedging instruments:
Interest rate swaps	Other non-current liabilities	(8,271		)	(7,247		)
Total derivative contracts:
Prepaid and other current assets			$2,884			$431
Other assets		—			257
Total derivative assets		2,884			688
Other current liabilities		(5,811		)	(1,934		)
Other non-current liabilities		(9,563		)	(7,443		)
Total derivative liabilities			($15,374	)		($9,377	)

(a) See Note 10 — Fair Value Measurements for further information on the fair value of the Company’s derivatives including their classification within the fair value hierarchy.

Offsetting Derivatives

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