DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2019

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 (loss) 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.

FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS

The functional currency of Rayonier’s wholly owned subsidiary, Rayonier New Zealand Limited, and the New Zealand subsidiary is the New Zealand dollar. The New Zealand subsidiary is exposed to foreign currency risk on export sales and ocean freight payments which are mainly denominated in U.S. dollars. The New Zealand subsidiary typically hedges 50% to 90% of its estimated foreign currency exposure with respect to the following twelve months forecasted sales and purchases and up to 75% of the forward 12 to 18 months. Foreign currency exposure from the New Zealand subsidiary’s trading operations is typically hedged based on the following three months forecasted sales and purchases. As of September 30, 2019, foreign currency exchange contracts and foreign currency option contracts had maturity dates through December 2020 and March 2021, 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 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 (loss) income for de-designated hedges remains in accumulated other comprehensive (loss) income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

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 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.

The following table contains information on the outstanding interest rate swaps as of September 30, 2019:

Outstanding Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount		Related Debt Facility	Fixed Rate of Swap		Bank Margin on Debt		Total Effective Interest Rate (b)
August 2015	9 years		$170,000	Term Credit Agreement	2.20	%	1.63	%	3.83	%
August 2015	9 years	180,000		Term Credit Agreement	2.35	%	1.63	%	3.98	%
April 2016	10 years	100,000		Incremental Term Loan	1.60	%	1.90	%	3.50	%
April 2016	10 years	100,000		Incremental Term Loan	1.60	%	1.90	%	3.50	%
July 2016	10 years	100,000		Incremental Term Loan	1.26	%	1.90	%	3.16	%

(a) All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.

(b) Rate is before estimated patronage payments.

CARBON OPTIONS

The New Zealand subsidiary enters into carbon options from time to time to sell carbon assets at certain prices. Changes in fair value of the carbon option contracts are recorded in “Interest and other miscellaneous income, net” as the contracts did not qualify for hedge accounting treatment. As of September 30, 2019, carbon option contracts had maturity dates through April 2020.

The following tables demonstrate the impact, gross of tax, of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2019 and 2018.

		Three Months Ended September 30,
	Income Statement Location	2019			2018
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive (loss)		($2,870	)		($1,402	)
Foreign currency option contracts	Other comprehensive (loss)	(300		)	(29		)
Interest rate swaps	Other comprehensive (loss)	(10,141		)	5,173
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Interest and other miscellaneous income, net	—			(189		)
Carbon option contracts	Interest and other miscellaneous income, net	—			(577		)

		Nine Months Ended September 30,
	Income Statement Location	2019			2018
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive (loss)		($1,971	)		($6,800	)
Foreign currency option contracts	Other comprehensive (loss)	(330		)	(388		)
Interest rate swaps	Other comprehensive (loss)	(40,972		)	26,461
Derivatives designated as a net investment hedge:
Foreign currency exchange contract	Other comprehensive (loss)	—			(344		)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Interest and other miscellaneous income, net	135			2,419
Carbon option contracts	Interest and other miscellaneous income, net	414			(577		)

During the next 12 months, the amount of the September 30, 2019 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 $2.5 million.

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

	Notional Amount
	September 30, 2019		December 31, 2018
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts		$60,750		$69,950
Foreign currency option contracts	28,000		24,000
Interest rate swaps	650,000		650,000
Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	—		9,396
Carbon options (a)	3,115		2,517

(a)    Notional amount for carbon options is calculated as the number of units outstanding multiplied by the spot price as of September 30, 2019.

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)
		September 30, 2019			December 31, 2018
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current liabilities	(3,288		)	(1,569		)
	Other non-current liabilities	(253		)	—
Foreign currency option contracts	Other current assets	15			217
	Other assets	138			102
	Other current liabilities	(179		)	(106		)
	Other non-current liabilities	(159		)	(68		)
Interest rate swaps	Other assets	750			23,735
	Other non-current liabilities	(17,987		)	—
Derivative not designated as a hedging instrument:
Foreign currency exchange contracts	Other current assets	—			152
	Other current liabilities	—			(24		)
Carbon options	Other current liabilities	(2		)	(322		)
Total derivative contracts:
Other current assets			$15			$369
Other assets		888			23,837
Total derivative assets			$903			$24,206
Other current liabilities		(3,469		)	(2,021		)
Other non-current liabilities		(18,399		)	(68		)
Total derivative liabilities			($21,868	)		($2,089	)

(a)    See Note 14 — 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.