DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. The Company uses derivative financial instruments to mitigate the financial impact of exposure to these risks.

Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the Company’s investment in its New Zealand operations is partially or completely liquidated. The ineffective portion of any hedge, changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was de minimis for all periods presented.

Foreign Currency Exchange and Option Contracts

The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of June 30, 2016, foreign currency exchange contracts and foreign currency option contracts had maturity dates through November 2017.

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

The Company may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

In August 2015, the Company entered into foreign currency option contracts (notional amount of $332 million) to mitigate the risk of fluctuations in foreign currency exchange rates when translating the New Zealand JV’s balance sheet to U.S. dollars. These contracts hedged a portion of the Company’s net investment in New Zealand and qualified as a net investment hedge. The fair value of these contracts was determined by a mark-to-market valuation, which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The hedges qualified for hedge accounting whereby fluctuations in fair market value during the life of the hedge are recorded in AOCI and remain there permanently unless a partial or full liquidation of the investment is made. At each reporting period, the Company reviews the hedges for ineffectiveness. Ineffectiveness can occur when changes to the investment or the hedged instrument are made such that the risk of foreign exchange movements are no longer mitigated by the hedging instrument. At that time, the amount related to the ineffectiveness of the hedge is recorded into earnings. The Company did not have any ineffectiveness during the life of the hedges. The foreign currency option contracts matured on February 3, 2016.

On February 1, 2016, the Company entered into foreign currency option contracts (notional amounts of $159.7 million and $154.6 million) to mitigate the risk of fluctuations in foreign exchange rates when funding the planned capital contribution to the New Zealand JV. On February 29, 2016, the contracts were settled for a net premium of $0.3 million. The gain on these contracts was recorded in “Other operating income, net” as they did not qualify for hedge accounting treatment.

On February 29, 2016, the Company purchased a foreign exchange forward contract (notional amount $159.5 million) to mitigate the risk of fluctuations in foreign exchange rate contracts when funding the planned capital contribution to the New Zealand JV. The contract matured on March 3, 2016, resulting in a gain of $0.9 million. The gain on this contract was recorded in “Other operating income, net” as it did not qualify for hedge accounting treatment.

Interest Rate Swaps

The Company used interest rate swaps to manage the New Zealand JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. On March 3, 2016, as part of the capital contribution into the New Zealand JV, the Company settled all remaining New Zealand JV interest rate swaps for $9.3 million. Initially, these hedges qualified for hedge accounting; however, upon consolidation of the New Zealand JV in 2013, the hedges no longer qualified, requiring all future changes in the fair market value of the hedges to be recorded in earnings.

The Company is exposed to cash flow interest rate risk on its variable-rate Term Credit Agreement and Incremental Term Loan Agreement (as discussed below), and uses variable-to-fixed interest rate swaps to hedge this exposure. For these derivative instruments, the Company reports the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassifies them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.

In August 2015, the Company entered into a nine-year interest rate swap agreement for a notional amount of $170 million. This swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.20%. Together with the bank margin of 1.63%, this results in a rate of 3.83% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

Also, in August 2015, the Company entered into a nine-year forward interest rate swap agreement with a start date in April 2016 for a notional amount of $180 million. This swap agreement fixes the variable portion of the interest rate on the Term Credit Agreement borrowings due 2024 from LIBOR to an average rate of 2.35%. Together with the bank margin of 1.63%, this results in a rate of 3.97% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

In April 2016, the Company entered into two nine-year interest rate swap agreements, each for a notional amount of $100 million. These swap agreements fix the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 to an average rate of 1.60%. Together with the bank margin of 1.90%, this results in a rate of 3.50% before estimated patronage payments.These derivative instruments have been designated as interest rate cash flow hedges and qualify for hedge accounting.

Subsequent Event

See Note 1 — Basis of Presentation for additional information on subsequent events.

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2016 and 2015.



		Three Months Ended June 30,
	Income Statement Location	2016			2015
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)		$1,116			($1,621	)
Foreign currency option contracts	Other comprehensive income (loss)	1,096			(2,658		)
Interest rate swaps	Other comprehensive income (loss)	(14,102		)	—

Derivatives designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive income (loss)	—			2,173

Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating income, net	—			—
Foreign currency option contracts	Other operating income, net	—			546
Interest rate swaps	Interest income and miscellaneous income (expense), net	—			(1,417		)



		Six Months Ended June 30,
	Income Statement Location	2016			2015
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)		$1,816			($2,308	)
Foreign currency option contracts	Other comprehensive income (loss)	1,929			(3,339		)
Interest rate swaps	Other comprehensive income (loss)	(28,988		)	—

Derivatives designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive income (loss)	(4,606		)	3,107

Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating income, net	895			—
Foreign currency option contracts	Other operating income, net	258			546
Interest rate swaps	Interest income and miscellaneous income (expense), net	(1,219		)	(3,273		)

During the next 12 months, the amount of the June 30, 2016 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a gain of approximately $0.7 million.

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



	Notional Amount
	June 30, 2016		December 31, 2015
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts		$32,800		$21,250
Foreign currency option contracts	89,300		107,200
Interest rate swaps	550,000		350,000

Derivatives designated as net investment hedges:
Foreign currency option contracts	—		331,588

Derivative not designated as a hedging instrument:
Interest rate swaps	—		130,169

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, 2016			December 31, 2015
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current assets		$758			$43
	Other assets	235			—
	Other current liabilities	(793		)	(1,449		)
	Other non-current liabilities	—			(219		)
Foreign currency option contracts	Other current assets	1,339			560
	Other assets	568			408
	Other current liabilities	(342		)	(1,393		)
	Other non-current liabilities	(279		)	(217		)
Interest rate swaps	Other non-current liabilities	(39,185		)	(10,197		)

Derivatives designated as net investment hedges:
Foreign currency option contracts	Other current assets	—			4,630
	Other current liabilities	—			(24		)

Derivative not designated as a hedging instrument:
Interest rate swaps	Other non-current liabilities	—			(8,047		)

Total derivative contracts:
Other current assets			$2,097			$5,233
Other assets		803			408
Total derivative assets			$2,900			$5,641

Other current liabilities		(1,135		)	(2,866		)
Other non-current liabilities		(39,464		)	(18,680		)
Total derivative liabilities			($40,599	)		($21,546	)


(a)	See Note 13 — 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.