DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2017

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 uses derivative financial instruments to mitigate the financial impact of exposure to these risks.

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

Foreign Currency Exchange and Option Contracts

The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand JV is the New Zealand dollar. The New Zealand JV is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand JV typically hedges 35% to 90% of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 25% to 75% of forecasted sales and purchases for the forward three to 12 months and up to 50% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand JV’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of March 31, 2017, foreign currency exchange contracts and foreign currency option contracts had maturity dates through February 2019 and August 2018, respectively.

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

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

In March 2017, the Company purchased foreign exchange forward contracts (notional amount of $11.3 million) to mitigate the risk of fluctuations in foreign exchange rates when making shareholder loan payments which are denominated in U.S. dollars. For additional information on the shareholder loan see Note 4 — Debt. The New Zealand JV typically hedges 75% to 100% of its estimated foreign currency exposure with respect to the following three months forecasted distributions, up to 75% of forecasted distributions for the forward three to six months and up to 50% of the forward six to 12 months. As of March 31, 2017, the change in fair value of the foreign exchange forward contracts of $0.1 million was recorded in “Interest income and miscellaneous (income) expense, net” as it did not qualify for hedge accounting treatment.

Interest Rate Swaps

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

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

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 two10-year interest rate swap agreements, each for a notional amount of $100 million. These swap agreements fix the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 to an average rate of 1.60%. Together with the bank margin of 1.90%, this results in a rate of 3.50% before estimated patronage payments. These derivative instruments have been designated as interest rate cash flow hedges and qualify for hedge accounting.

In July 2016, the Company entered into an interest rate swap agreement for a notional amount of $100 million through May 2026. This swap agreement fixes the variable portion of the interest rate on the Incremental Term Loan borrowings due 2026 from LIBOR to an average rate of 1.26%. Together with the bank margin of 1.90%, this results in a rate of 3.16% before estimated patronage payments. This derivative instrument has been designated as an interest rate cash flow hedge and qualifies for hedge accounting.

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 and 2016.

		Three Months Ended March 31,
	Income Statement Location	2017			2016
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)		($71	)		$711
Foreign currency option contracts	Other comprehensive income (loss)	(41		)	833
Interest rate swaps	Other comprehensive income (loss)	2,633			(14,886		)
Derivatives designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive income (loss)	—			(4,606		)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating income, net	—			895
	Interest income and miscellaneous income (expense), net	125			—
Foreign currency option contracts	Other operating income, net	—			258
Interest rate swaps	Interest income and miscellaneous income (expense), net	—			(1,219		)

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

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

	Notional Amount
	March 31, 2017		December 31, 2016
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts		$61,200		$44,800
Foreign currency option contracts	81,000		91,000
Interest rate swaps	650,000		650,000
Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	11,250		—

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

	Location on Balance Sheet	Fair Value Assets / (Liabilities) (a)
		March 31, 2017			December 31, 2016
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current assets		$730			$692
	Other assets	102			33
	Other current liabilities	(223		)	(261		)
	Other non-current liabilities	(7		)	—
Foreign currency option contracts	Other current assets	718			1,064
	Other assets	167			327
	Other current liabilities	(335		)	(574		)
	Other non-current liabilities	(200		)	(426		)
Interest rate swaps	Other assets	18,106			17,204
	Other non-current liabilities	(4,248		)	(5,979		)
Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	Other current assets	121			—
Total derivative contracts:
Other current assets			$1,569			$1,756
Other assets		18,375			17,564
Total derivative assets			$19,944			$19,320
Other current liabilities		(558		)	(835		)
Other non-current liabilities		(4,455		)	(6,405		)
Total derivative liabilities			($5,013	)		($7,240	)

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

Offsetting Derivatives

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