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EX-32 - EXHIBIT 32 - POTLATCHDELTIC CORPpch20150630ex32.htm
EX-31 - EXHIBIT 31 - POTLATCHDELTIC CORPpch20150630ex31.htm


 
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, 2015
or 
¨
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 1-32729
 

 POTLATCH CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
82-0156045
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
601 West First Avenue, Suite 1600
 
 
Spokane, Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
(509) 835-1500
(Registrant’s telephone number, including area code)


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  ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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
 
¨  (Do not check if a smaller reporting company)
 
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  ¨    No  x
The number of shares of common stock of the registrant outstanding as of July 27, 2015 was 40,677,586.
 




POTLATCH CORPORATION AND CONSOLIDATED SUBSIDIARIES
Table of Contents
 
 
 
 
Page  Number
PART I. - FINANCIAL INFORMATION
 
ITEM 1.
 
 
 
 
 
 
ITEM 2.
ITEM 3.
ITEM 4.
PART II. - OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 6.





Part I

ITEM 1. FINANCIAL STATEMENTS
 
Potlatch Corporation and Consolidated Subsidiaries
Consolidated Statements of Income
Unaudited (Dollars in thousands, except per share amounts)
 

 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
  
 
 
2015
 
2014
 
2015
 
2014
Revenues
$
128,747

 
$
143,919

 
$
262,872

 
$
283,498

Costs and expenses:
 
 
 
 
 
 
 
Cost of goods sold
109,441

 
101,849

 
217,213

 
200,442

Selling, general and administrative expenses
11,995

 
12,345

 
24,321

 
22,022

 
121,436

 
114,194

 
241,534

 
222,464

Operating income
7,311

 
29,725

 
21,338

 
61,034

Interest expense, net
(8,016
)
 
(5,509
)
 
(16,085
)
 
(10,969
)
Income (loss) before income taxes
(705
)
 
24,216

 
5,253

 
50,065

Income taxes
1,416

 
(7,946
)
 
1,114

 
(13,445
)
Net income
$
711

 
$
16,270

 
$
6,367

 
$
36,620

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.02

 
$
0.40

 
$
0.16

 
$
0.90

Diluted
$
0.02

 
$
0.40

 
$
0.16

 
$
0.90

Distributions per share
$
0.375

 
$
0.35

 
$
0.75

 
$
0.70

Weighted-average shares outstanding (in thousands):
 
 
 
 
 
 
 
Basic
40,843

 
40,741

 
40,822

 
40,726

Diluted
40,963

 
40,850

 
40,933

 
40,833

The accompanying notes are an integral part of these condensed consolidated financial statements.



2



 
Potlatch Corporation and Consolidated Subsidiaries
Consolidated Statements of Comprehensive Income
Unaudited (Dollars in thousands)
 

 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
  
 
 
2015
 
2014
 
2015
 
2014
Net income
$
711

 
$
16,270

 
$
6,367

 
$
36,620

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Pension and other postretirement employee benefits:
 
 
 
 
 
 
 
Amortization of prior service credit included in net periodic cost, net of tax of $(848), $(867), $(1,697) and $(1,734)
(1,328
)
 
(1,356
)
 
(2,656
)
 
(2,712
)
Amortization of actuarial loss included in net periodic cost, net of tax of $1,900, $1,568, $3,837 and $3,245
2,974

 
2,452

 
6,003

 
5,074

Other comprehensive income, net of tax
1,646

 
1,096

 
3,347

 
2,362

Comprehensive income
$
2,357

 
$
17,366

 
$
9,714

 
$
38,982

Amortization of prior service credit and amortization of actuarial loss are included in the computation of net periodic cost (benefit). See Note 7: Pension and Other Postretirement Employee Benefits for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.



3



 
Potlatch Corporation and Consolidated Subsidiaries
Condensed Consolidated Balance Sheets
Unaudited (Dollars in thousands, except per share amounts)
 

 
June 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
8,783

 
$
4,644

Short-term investments
1,831

 
26,368

Receivables, net
18,055

 
9,928

Inventories
41,124

 
31,490

Deferred tax assets, net
6,168

 
6,168

Other assets
14,335

 
15,065

Total current assets
90,296

 
93,663

Property, plant and equipment, net
73,766

 
65,749

Timber and timberlands, net
824,587

 
828,420

Deferred tax assets, net
36,794

 
37,228

Other assets
14,809

 
10,361

Total assets
$
1,040,252

 
$
1,035,421

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
61,531

 
$
49,324

Current portion of long-term debt
27,500

 
22,870

Revolving line of credit borrowings
15,000

 

Total current liabilities
104,031

 
72,194

Long-term debt
601,759

 
606,473

Liability for pension and other postretirement employee benefits
115,127

 
115,936

Other long-term obligations
14,043

 
15,752

Total liabilities
834,960

 
810,355

Stockholders' equity:
 
 
 
Common stock, $1 par value
40,678

 
40,605

Additional paid-in capital
347,433

 
346,441

Accumulated deficit
(67,774
)
 
(43,588
)
Accumulated other comprehensive loss
(115,045
)
 
(118,392
)
Total stockholders’ equity
205,292

 
225,066

Total liabilities and stockholders' equity
$
1,040,252

 
$
1,035,421

The accompanying notes are an integral part of these condensed consolidated financial statements.



4



 
Potlatch Corporation and Consolidated Subsidiaries
Condensed Consolidated Statements of Cash Flows
Unaudited (Dollars in thousands)
 
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
6,367

 
$
36,620

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation, depletion and amortization
15,597

 
11,002

Basis of real estate sold
1,008

 
6,834

Change in deferred taxes
(1,707
)
 
536

Employee benefit plans
3,166

 
(267
)
Equity-based compensation expense
2,259

 
2,032

Other, net
(5,496
)
 
(1,161
)
Working capital and operating-related activities, net
(4,538
)
 
12,836

Net cash from operating activities
16,656

 
68,432

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Change in short-term investments
24,537

 
(21,665
)
Property, plant and equipment
(12,248
)
 
(6,508
)
Timberlands reforestation and roads
(6,004
)
 
(5,887
)
Other, net
433

 
334

Net cash from investing activities
6,718

 
(33,726
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Distributions to common stockholders
(30,507
)
 
(28,413
)
Revolving line of credit borrowings
15,000

 

Employee tax withholdings on equity-based compensation
(1,445
)
 
(1,079
)
Change in book overdrafts
(2,246
)
 
(1,424
)
Other, net
(37
)
 
(124
)
Net cash from financing activities
(19,235
)
 
(31,040
)
Change in cash
4,139

 
3,666

Cash at beginning of period
4,644

 
5,586

Cash at end of period
$
8,783

 
$
9,252

SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
13,702

 
$
10,431

Income taxes, net
$
1,512

 
$
6,546

The accompanying notes are an integral part of these condensed consolidated financial statements.


5





NOTE 1. BASIS OF PRESENTATION
For purposes of this report, any reference to “Potlatch,” “the company,” “we,” “us,” and “our” means Potlatch Corporation and all of its wholly-owned subsidiaries, except where the context indicates otherwise.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission pertaining to interim financial statements; certain disclosures normally provided in accordance with generally accepted accounting principles in the United States have been omitted. This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission on February 13, 2015. We believe that all adjustments necessary for a fair statement of the results of such interim periods have been included and all such adjustments are of a normal recurring nature.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest, Simplifying the Presentation of Debt Issuance Costs. The amendments in ASU No. 2015-3 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU No. 2015-03 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements or financial covenants.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory. The amendments in ASU No. 2015-11 apply to inventory measures using first-in, first-out (FIFO) or average cost and will require entities to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the normal coarse of business, minus the cost of completion, disposal and transportation. Replacement cost and net realizable value less a normal profit margin will no longer be considered. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The adoption of this guidance is not expected to have a significant effect on our consolidated financial statements.


6



NOTE 3. EARNINGS PER SHARE
The following table details the number of shares used in calculating basic and diluted earnings per share:
 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
(Dollars in thousands, except per-share amounts)
2015
 
2014
 
2015
 
2014
Net income
$
711


$
16,270

 
$
6,367

 
$
36,620

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
40,842,672

 
40,740,979

 
40,822,326

 
40,726,397

Incremental shares due to:
 
 
 
 
 
 
 
Performance shares
100,915

 
82,013

 
92,130

 
77,139

Restricted stock units
19,901

 
24,642

 
18,396

 
26,727

Stock options

 
2,619

 

 
2,778

Diluted weighted-average shares outstanding
40,963,488

 
40,850,253

 
40,932,852

 
40,833,041

 
 
 
 
 
 
 
 
Basic net income per share
$
0.02

 
$
0.40

 
$
0.16

 
$
0.90

Diluted net income per share
$
0.02

 
$
0.40

 
$
0.16

 
$
0.90

 
 
 
 
 
 
 
 
Antidilutive shares excluded from the calculation:
 
 
 
 
 
 
 
Performance shares

 
13,322

 
60,547

 
38,776

Restricted stock units
1,000

 
369

 
20,179

 

Total antidilutive shares excluded from the calculation
1,000

 
13,691

 
80,726

 
38,776



NOTE 4. INVENTORIES
The following table details the composition of our inventories:
(Dollars in thousands)
June 30, 
 2015
 
December 31, 
 2014
Inventories:
 
 
 
Wood Products finished goods inventory
$
16,980

 
$
17,286

Logs
16,670

 
7,930

Materials and supplies
7,474

 
6,274

 
$
41,124

 
$
31,490




7



NOTE 5. DEBT
                     
Our credit agreement, dated August 12, 2014, provides for a revolving line of credit up to $250 million, which includes $40 million for the issuance of stand by letters of credit and $25 million for swingline loans. At June 30, 2015, $15.0 million was outstanding under the revolving line of credit and approximately $1.4 million was utilized by outstanding letters of credit, resulting in $233.6 million available for additional borrowings.

NOTE 6. EQUITY-BASED COMPENSATION
As of June 30, 2015, we had two stock incentive plans under which performance shares, restricted stock units (RSUs) and deferred compensation stock equivalent units were outstanding. These plans have received shareholder approval. We were originally authorized to issue up to 1.6 million shares and 1.0 million shares under our 2005 Stock Incentive Plan and 2014 Stock Incentive Plan, respectively. At June 30, 2015, approximately 1.0 million shares were authorized for future use under the two plans. We issue new shares of common stock to settle performance shares, restricted stock units and deferred compensation stock equivalent units.
The following table details compensation expense and the related income tax benefit:
 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Employee equity-based compensation expense:
 
 
 
 
 
 
 
Performance shares
$
950

 
$
961

 
$
1,822

 
$
1,695

Restricted stock units
232

 
163

 
437

 
337

Total employee equity-based compensation expense
$
1,182

 
$
1,124

 
$
2,259

 
$
2,032

 
 
 
 
 
 
 
 
Deferred compensation stock equivalent units expense (income)
$
47

 
$
427

 
$
166

 
$
(14
)
 
 
 
 
 
 
 
 
Total tax benefit recognized for share-based expense
$
78

 
$
81

 
$
152

 
$
155

PERFORMANCE SHARES
The following table presents the key inputs used in the Monte Carlo simulation method to calculate the fair value of the performance share awards in 2015 and 2014, and the resulting fair values:
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
Shares granted
78,974

 
87,441

Stock price as of valuation date
$
40.00

 
$
39.76

Risk-free rate
1.07
%
 
0.72
%
Fair value of a performance share
$
36.71

 
$
45.57

The following table summarizes outstanding performance share awards as of June 30, 2015, and changes during the six months ended June 30, 2015:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted-Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
160,233

 
$
53.86

 
 
Granted
78,974

 
$
36.71

 
 
Unvested shares outstanding at June 30
239,207

 
$
48.20

 
$
8,112


8



As of June 30, 2015, there was $5.0 million of unrecognized compensation cost related to unvested performance share awards, which is expected to be recognized over a weighted-average period of 1.9 years.
RESTRICTED STOCK UNITS
The following table summarizes outstanding RSU awards as of June 30, 2015, and changes during the six months ended June 30, 2015:
(Dollars in thousands, except grant date fair value)
Shares
 
Weighted-Avg.
Grant Date
Fair Value
 
Aggregate
Intrinsic Value
Unvested shares outstanding at January 1
32,455

 
$
42.24

 
 
Granted
27,820

 
$
39.99

 
 
Vested
(2,400
)
 
$
45.79

 
 
Unvested shares outstanding at June 30
57,875

 
$
41.01

 
$
2,044

The fair value of each RSU equaled our common share price on the date of grant. The total fair value of RSU awards vested during the six months ended June 30, 2015 was $0.1 million. As of June 30, 2015, there was $1.5 million of total unrecognized compensation cost related to unvested RSU awards, which is expected to be recognized over a weighted-average period of 1.8 years.

NOTE 7. PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The following tables detail the components of net periodic cost (benefit) of our pension plans and other postretirement employee benefits (OPEB):
 
Quarters Ended June 30,
 
Pension
 
OPEB
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
1,531

 
$
1,339

 
$
4

 
$
(11
)
Interest cost
4,259

 
4,783

 
345

 
372

Expected return on plan assets
(5,192
)
 
(6,126
)
 

 

Amortization of prior service cost (credit)
152

 
187

 
(2,328
)
 
(2,410
)
Amortization of actuarial loss
4,408

 
3,606

 
466

 
414

Net periodic cost (benefit)
$
5,158

 
$
3,789

 
$
(1,513
)
 
$
(1,635
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
Pension
 
OPEB
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Service cost
$
3,061

 
$
2,540

 
$
11

 
$
12

Interest cost
8,518

 
9,592

 
728

 
871

Expected return on plan assets
(10,383
)
 
(12,256
)
 

 

Amortization of prior service cost (credit)
303

 
374

 
(4,656
)
 
(4,820
)
Amortization of actuarial loss
8,816

 
7,226

 
1,024

 
1,093

Net periodic cost (benefit)
$
10,315

 
$
7,476

 
$
(2,893
)
 
$
(2,844
)
During the six months ended June 30, 2015, we paid non-qualified supplemental pension benefits of $0.9 million.


9



The following tables detail the changes in accumulated other comprehensive loss (AOCL):
 
Quarter Ended June 30, 2015
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at April 1
 
 
 
 
$
116,691

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(92
)
 
$
1,420

 
1,328

Actuarial loss
(2,689
)
 
(285
)
 
(2,974
)
Total reclassification for the period
$
(2,781
)
 
$
1,135

 
(1,646
)
AOCL at June 30
 
 
 
 
$
115,045

 
 
 
 
 
 
 
Quarter Ended June 30, 2014
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at April 1
 
 
 
 
$
97,454

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(114
)
 
$
1,470

 
1,356

Actuarial loss
(2,200
)
 
(252
)
 
(2,452
)
Total reclassification for the period
$
(2,314
)
 
$
1,218

 
(1,096
)
AOCL at June 30
 
 
 
 
$
96,358

 
 
 
 
 
 
 
Six Months Ended June 30, 2015
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at January 1
 
 
 
 
$
118,392

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(184
)
 
$
2,840

 
2,656

Actuarial loss
(5,378
)
 
(625
)
 
(6,003
)
Total reclassification for the period
$
(5,562
)
 
$
2,215

 
(3,347
)
AOCL at June 30
 
 
 
 
$
115,045

 
 
 
 
 
 
 
Six Months Ended June 30, 2014
(Dollars in thousands)
Pension
 
OPEB
 
Total
AOCL at January 1
 
 
 
 
$
98,720

Amortization of defined benefit items, net of tax:1
 
 
 
 
 
Prior service credit (cost)
$
(228
)
 
$
2,940

 
2,712

Actuarial loss
(4,408
)
 
(666
)
 
(5,074
)
Total reclassification for the period
$
(4,636
)
 
$
2,274

 
(2,362
)
AOCL at June 30
 
 
 
 
$
96,358

 
 
 
 
 
 
1 Amortization of prior service credit (cost) and amortization of actuarial loss are included in the computation of net periodic cost (benefit).



10



NOTE 8. FINANCIAL INSTRUMENTS
The following table presents the estimated fair values of our financial instruments:
 
June 30, 2015
 
December 31, 2014
(Dollars in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and short-term investments (Level 1)
$
10,614

 
$
10,614

 
$
31,012

 
$
31,012

Revolving line of credit borrowings (Level 1)
$
15,000

 
$
15,000

 
$

 
$

Derivative asset related to interest rate swaps (Level 2)
$
799

 
$
799

 
$
793

 
$
793

Long-term debt, including fair value adjustments related to fair value hedges (Level 2)
$
629,259

 
$
655,529

 
$
629,343

 
$
657,943

Company owned life insurance asset (COLI) (Level 3)
$
1,454

 
$
1,454

 
$
877

 
$
877

For cash and short-term investments, the carrying amount approximates fair value due to the short-term nature of these financial instruments. The fair value of the interest rate swaps was determined by discounting the expected cash flows of each derivative. The analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate forward curves. For our revolving line of credit borrowings, the carrying amount approximates fair value due to the short-term nature of the borrowings. The fair value of our long-term debt is estimated based upon the quoted market prices for the same or similar debt issues, or estimated based on average market prices for comparable debt when there is no quoted market price. Contract value of our COLI, the amount at which it could be redeemed, is used as a practical expedient to estimate fair value because market prices are not readily available.
BALANCE SHEET AND INCOME EFFECTS OF DERIVATIVES
We have seven interest rate swaps to convert interest payments on fixed rate debt to variable rate 3-month LIBOR plus a spread, with the objective of managing exposure to fluctuations in market interest rates on our debt balances.
The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:
(Dollars in thousands)
Location
 
June 30,
2015
 
December 31,
2014
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate contracts
Current assets
 
$
233

 
$
372

Interest rate contracts
Non-current assets
 
566

 
421

Total derivatives designated as hedging instruments
 
 
$
799

 
$
793

The following table details the effect of derivatives on our Consolidated Statements of Income:
 
 
 
Gain Recognized in Income
 
Location
 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
(Dollars in thousands)
 
 
2015
 
2014
 
2015
 
2014
Derivatives designated in fair value hedging relationships:
 
 
 
 
 
 
 
 
 
Realized gain on interest rate contract 1
Interest expense
 
$
409

 
$
247

 
$
788

 
$
501

Net gain recognized in income from fair value hedges
 
 
$
409

 
$
247

 
$
788

 
$
501

 
1 Realized gain on hedging instrument consists of net cash settlements and interest accruals on the interest rate swaps during the periods. Net cash settlements are included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.
No net unrealized gain or loss associated with the interest rate swaps was recognized in income for any of the periods presented because we recognized no hedge ineffectiveness.


11



NOTE 9. INCOME TAXES
As a real estate investment trust (REIT), we generally are not subject to federal and state corporate income taxes on income of the REIT that we distribute to our shareholders. We are, however, subject to corporate income taxes on built-in gains (the excess of fair market value over tax basis on January 1, 2006) on sales of real property by the REIT during the first ten years following our REIT conversion, which ends on December 31, 2015. The sale of standing timber is not subject to built-in gains tax. The Small Business Jobs Act of 2010 modified the built-in gains provisions to exempt sales of real properties in 2011, if five years of the recognition period had elapsed before January 1, 2011. The reduced five-year holding period was extended each year through 2014. Accordingly, the built-in gains tax did not apply to our sales of real property through 2014; however, the built-in gains tax applies to REIT sales of real property in 2015.
We conduct certain activities through our taxable REIT subsidiaries (TRS), which are subject to corporate level federal and state income taxes. These taxable activities are principally comprised of our wood products manufacturing operations and certain real estate investments. Therefore, income taxes are primarily due to income of the TRS.

NOTE 10. COMMITMENTS AND CONTINGENCIES
There have been no material changes to our commitments and contingencies as reported in "Note 14: Commitments and Contingencies" in the Notes to Consolidated Financial Statements in our 2014 Annual Report on Form 10-K.


12



NOTE 11. SEGMENT INFORMATION
The following table summarizes information by business segment:
 
Quarter Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Resource
$
44,111

 
$
39,512

 
$
98,066

 
$
91,417

Wood Products
84,191

 
100,572

 
173,424

 
188,376

Real Estate
10,745

 
15,737

 
13,856

 
30,176

 
139,047

 
155,821

 
285,346

 
309,969

Elimination of intersegment revenues - Resource
(10,300
)
 
(11,902
)
 
(22,474
)
 
(26,471
)
Total consolidated revenues
$
128,747

 
$
143,919

 
$
262,872

 
$
283,498

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Resource
$
8,797

 
$
10,818

 
$
23,775

 
$
27,042

Wood Products
(1,953
)
 
14,870

 
1,547

 
27,577

Real Estate
8,521

 
12,378

 
10,120

 
20,649

Eliminations and adjustments
539

 
788

 
3,514

 
1,630

 
15,904

 
38,854

 
38,956

 
76,898

Corporate
(8,593
)
 
(9,129
)
 
(17,618
)
 
(15,864
)
Operating income
7,311

 
29,725

 
21,338

 
61,034

Interest expense, net
(8,016
)
 
(5,509
)
 
(16,085
)
 
(10,969
)
Income (loss) before income taxes
$
(705
)
 
$
24,216

 
$
5,253


$
50,065

 
 
 
 
 
 
 
 
Depreciation, depletion and amortization:1
 
 
 
 
 
 
 
Resource
$
4,797

 
$
2,728

 
$
11,051

 
$
6,644

Wood Products
1,661

 
1,515

 
3,237

 
3,044

Real Estate
15

 
14

 
30

 
29

 
6,473

 
4,257

 
14,318

 
9,717

Corporate
620

 
641

 
1,279

 
1,285

Total depreciation, depletion and amortization
$
7,093

 
$
4,898

 
$
15,597

 
$
11,002

 
 
 
 
 
 
 
 
Basis of real estate sold:
 
 
 
 
 
 
 
Real Estate
$
710

 
$
2,242

 
$
1,181

 
$
7,409

Eliminations and adjustments
(110
)
 
(30
)
 
(173
)
 
(575
)
Total basis of real estate sold
$
600

 
$
2,212

 
$
1,008

 
$
6,834

1
The presentation of depreciation, depletion and amortization in Segment Information and the Condensed Consolidated Statements of Cash Flows includes amortization of bond discounts and deferred loan fees. Bond discounts and deferred loan fees are recorded in Interest expense, net in the Consolidated Statements of Income.


13



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information
This report contains, in addition to historical information, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, recognition of compensation costs relating to our performance shares and RSUs, U.S. housing market conditions, housing starts and recovery, real estate demand and pricing, log prices, lumber demand and prices, prevalence of stumpage sales in the south, business conditions for our business segments, fluctuation of sawlog, pulpwood and stumpage prices due to local market conditions, Resource segment results, Wood Products segment results, Real Estate segment results, expectations regarding repayment of outstanding loans under our Credit Agreement in the third quarter of 2015, and similar matters. Words such as “anticipate,” “expect,” “will,” “intend,” “plan,” “target,” “project,” “believe,” “seek,” “schedule,” “estimate,” “could,” “can,” “may” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements reflect our current views regarding future events based on estimates and assumptions and are therefore subject to known and unknown risks and uncertainties and are not guarantees of future performance. Our actual results of operations could differ materially from our historical results or those expressed or implied by forward-looking statements contained in this report. For a nonexclusive listing of forward-looking statements and potential factors affecting our business, refer to “Cautionary Statement Regarding Forward-Looking Information” on page 1 and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014.
Forward-looking statements contained in this report present our views only as of the date of this report. Except as required under applicable law, we do not intend to issue updates concerning any future revisions of our views to reflect events or circumstances occurring after the date of this report.

Results of Operations
Our business is organized into three reporting segments: Resource, Wood Products and Real Estate. Sales between segments are recorded as intersegment revenues based on prevailing market prices. Our Resource segment supplies our Wood Products segment with a portion of its wood fiber needs. Therefore, intersegment revenues typically represent a significant portion of the Resource segment’s total revenues. Our other segments generally do not generate intersegment revenues.
In the period-to-period discussions of our consolidated results of operations, our revenues are reported after elimination of intersegment revenues. In the discussions by business segments, each segment's revenues are presented before the elimination of intersegment revenues.

Overview
The operating results of our Resource, Wood Products and Real Estate business segments have been and will continue to be influenced by a variety of factors, including cyclical fluctuations in the forest products industry, changes in timber prices and in harvest levels from our timberlands, competition, timberland valuations, demand for our non-strategic timberland for higher and better use purposes, changes in lumber prices, the efficiency and level of capacity utilization of our wood products manufacturing operations, changes in our principal expenses such as log costs, asset dispositions or acquisitions and other factors.
In the three and six months ended June 30, 2015, our Resource and Wood Products segment results were affected by lower lumber prices resulting primarily from lower demand and excess supply in the lumber markets due to several factors, including adverse weather in the eastern part of the United States, a mild winter in the western part of the United States, lower log and lumber volume exports from North America to China and a strong U.S. dollar relative to the Canadian dollar. In addition, seasonally low harvest volumes and outages related to the completion of two large Wood Products capital projects lowered production volumes. Higher log prices in the Lake States and additional logging, hauling, depletion and employee costs increased operating expenses.

14



Consolidated Results Comparing the Quarters Ended June 30, 2015 and 2014
The following table sets forth period-to-period changes in items included in our Consolidated Statements of Income for the quarters ended June 30:
(Dollars in thousands)
2015
2014
 
Amount of Change
Percent Change
Revenues
$
128,747

$
143,919

 
$
(15,172
)
(11
)%
Costs and expenses:
 
 
 
 
 
Cost of goods sold
109,441

101,849

 
7,592

7
 %
Selling, general and administrative expenses
11,995

12,345

 
(350
)
(3
)%
 
121,436

114,194

 
7,242

6
 %
Operating income
7,311

29,725

 
(22,414
)
(75
)%
Interest expense, net
(8,016
)
(5,509
)
 
(2,507
)
46
 %
Income (loss) before income taxes
(705
)
24,216

 
(24,921
)
(103
)%
Income tax benefit (provision)
1,416

(7,946
)
 
9,362

(118
)%
Net income
$
711

$
16,270

 
$
(15,559
)
(96
)%
Revenues - Revenues decreased in the second quarter of 2015, compared with the same period last year, primarily due to lower revenues in Wood Products and Real Estate, partially offset by an increase in Resource revenues. Our Business Segment Results provide a more detailed discussion of our segments.
Cost of goods sold - Cost of goods sold increased in the second quarter of 2015, compared with the same period last year, primarily due to additional logging, hauling and depletion expense in our Resource segment as a result of our Alabama and Mississippi timberlands acquired in December 2014. Our Business Segment Results provide a more detailed discussion of our segments.
Selling, general and administrative expenses - Selling, general and administrative expenses decreased in the second quarter of 2015, compared with the same period last year, due to lower incentive compensation expense, partially offset by higher employee salary and benefit costs, including pension expense related to the adoption of updated mortality tables and a reduction in the discount rate.
Interest expense, net - Net interest expense increased $2.5 million, or 46%, in the second quarter of 2015, compared with the same period last year, due to the addition of $310 million in term loans in December 2014 to fund the 2014 acquisition of timberlands in Alabama and Mississippi.
Income tax provision - Income taxes are primarily due to income or loss from the TRS. For the second quarter of 2015, the tax benefit of $1.4 million is the result of the TRS’s loss before income tax of $3.9 million. For the second quarter of 2014, the tax expense of $7.9 million was the result of the TRS’s income before tax of $21.7 million.


15



Business Segment Results Comparing the Quarters Ended June 30, 2015 and 2014
Resource Segment
 
 
Quarter Ended June 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Increase
(Decrease)
Percent Change
Revenues1
$
44,111

$
39,512

 
$
4,599

12
 %
Cost of goods sold:
 
 
 
 
 
Logging and hauling
21,141

18,040

 
3,101

17
 %
Depreciation, depletion and amortization
4,742

2,651

 
2,091

79
 %
Other
7,893

6,425

 
1,468

23
 %
 
33,776

27,116

 
6,660

25
 %
Selling, general and administrative expenses
1,538

1,578

 
(40
)
(3
)%
Operating income
$
8,797

$
10,818

 
$
(2,021
)
(19
)%
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog
287,979

279,831

 
8,148

3
 %
 
Pulpwood
31,284

30,124

 
1,160

4
 %
 
Stumpage
3,277

2,475

 
802

32
 %
 
  Total
322,540

312,430

 
10,110

3
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
142,107

115,855

 
26,252

23
 %
 
Pulpwood
270,518

171,136

 
99,382

58
 %
 
Stumpage
53,176

952

 
52,224

n/m

 
  Total
465,801

287,943

 
177,858

62
 %
 
 
 
 
 
 
 
Total harvest volume
788,341

600,373

 
187,968

31
 %
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog 2
$
89

$
91

 
$
(2
)
(2
)%
 
Pulpwood 2
$
41

$
43

 
$
(2
)
(5
)%
 
Stumpage
$
6

$
11

 
$
(5
)
(45
)%
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog 2
$
41

$
43

 
$
(2
)
(5
)%
 
Pulpwood 2
$
34

$
33

 
$
1

3
 %
 
Stumpage
$
15

$
34

 
$
(19
)
(56
)%

1 Prior to elimination of intersegment fiber revenues of $10.3 million in 2015 and $11.9 million in 2014.
2 Sawlog and pulpwood sales prices are on a delivered basis, which includes logging and hauling.

Resource segment revenues increased $4.6 million in the second quarter of 2015, compared with the same period last year, primarily due to increased harvest volumes in our Southern region as a result of our Alabama and Mississippi timberlands acquired in December 2014. Total harvest volumes increased 31%.


16



Volumes in our Northern region increased 3% in the second quarter of 2015, compared with the same period last year, due to favorable logging conditions after spring break-up. Lower prices for sawlogs were the result of lower lumber prices as a significant portion of our sawlog sales are indexed to lumber on a one to three month lag. The decline in pulpwood prices reflects an annual reset in the contract price in Idaho.

As a result of our Alabama and Mississippi timberlands acquisition, stumpage sales (cutting contracts) will be more common in our Southern region. Stumpage prices can fluctuate based on a mix of pulpwood and sawlogs. Stumpage prices decreased in the second quarter of 2015 due to a higher mix of pulpwood, compared with sawlogs.

Logging, hauling and depletion expense increased due to higher harvest volumes. This was partially offset by lower fuel costs.

Wood Products Segment
 
Quarter Ended June 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Increase
(Decrease)
Percent Change
Revenues
$
84,191

$
100,572

 
$
(16,381
)
(16
)%
Cost of goods sold:1




 
 
 
Fiber costs
44,229

45,336

 
(1,107
)
(2
)%
Manufacturing costs
31,443

29,583

 
1,860

6
 %
Finished goods inventory change
2,629

3,000

 
(371
)
(12
)%
Other2
6,649

6,695

 
(46
)
(1
)%
 
84,950

84,614

 
336

 %
Selling, general and administrative expenses
1,194

1,088

 
106

10
 %
Operating income (loss)
$
(1,953
)
$
14,870

 
$
(16,823
)
(113
)%
 
 
 
 
 
 
Lumber shipments (MBF)
152,071

176,046

 
(23,975
)
(14
)%
Lumber sales prices ($ per MBF)
$
351

$
407

 
$
(56
)
(14
)%
1 Prior to elimination of intersegment fiber costs of $10.3 million in 2015 and $11.9 million in 2014.
2 Other cost of goods sold is primarily customer freight.

Revenues were $16.4 million lower in the second quarter of 2015, compared with the same period last year, due to lower lumber sale prices and lower shipments. Decreased shipments were largely the result of outages related to two large capital projects in our Michigan and Minnesota mills.

Cost of goods sold fluctuated based on the following factors:
Fiber costs decreased $1.1 million due to lower production volumes, partially offset by higher log costs in Michigan as a result of strong demand by pulp manufacturers in that region.
Manufacturing costs increased primarily due to labor costs as a result of annual salary increases and higher pension and benefit costs.
The change in finished goods inventory for the second quarter of 2015 was the result of higher inventory balances at March 31, 2015 due to weak markets and anticipated outages for capital projects. The change in finished goods inventory for the second quarter of 2014 was the result of higher inventory balances at March 31, 2014, which was the result of transportation restrictions resulting from adverse weather.

17



Real Estate Segment
 
Quarter Ended June 30,
 
 
(Dollars in thousands)
2015
2014
 
Increase (Decrease)
Percent Change
Revenues
$
10,745

$
15,737

 
$
(4,992
)
(32
)%
Cost of goods sold:



 
 
 
Basis of real estate sold
710

2,242

 
(1,532
)
(68
)%
Other
841

564

 
277

49
 %
 
1,551

2,806

 
(1,255
)
(45
)%
Selling, general and administrative expenses
673

553

 
120

22
 %
Operating income
$
8,521

$
12,378

 
$
(3,857
)
(31
)%
 
 
 
 
 
 
  
2015
 
2014
  
Acres Sold
Average
Price/Acre
 
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
514

$
11,467

 
1,424

$
2,025

Rural real estate
3,280

$
1,394

 
10,821

$
1,125

Non-strategic timberland
346

$
813

 
838

$
807

Total
4,140

 
 
13,083

 
Real Estate revenues decreased $5.0 million and operating income decreased $3.9 million in the second quarter of 2015, compared with the same period last year. In the second quarter of 2015, we sold a total of 4,140 acres, including two commercial real estate sites included in HBU, which increased our average price per acre. In the second quarter of 2014, we sold a total of 13,083 acres, including 9,400 acres of rural recreation property in Minnesota in one transaction.
Consolidated Results Comparing the Six Months Ended June 30, 2015 and 2014
The following table sets forth period-to-period changes in items included in our Consolidated Statements of Income for the six months ended June 30:
(Dollars in thousands)
2015
2014
 
Amount of Change
Percent Change
Revenues
262,872

283,498

 
$
(20,626
)
(7
)%
Costs and expenses:
 
 
 
 
 
Cost of goods sold
217,213

200,442

 
16,771

8
 %
Selling, general and administrative expenses
24,321

22,022

 
2,299

10
 %
 
241,534

222,464

 
19,070

9
 %
Operating income
21,338

61,034

 
(39,696
)
(65
)%
Interest expense, net
(16,085
)
(10,969
)
 
(5,116
)
47
 %
Income before income taxes
5,253

50,065

 
(44,812
)
(90
)%
Income tax benefit (provision)
1,114

(13,445
)
 
14,559

(108
)%
Net income
$
6,367

$
36,620

 
$
(30,253
)
(83
)%
Revenues - Revenues decreased in the first half of 2015, compared with the same period last year, primarily due to lower revenues in Wood Products and Real Estate, partially offset by an increase in Resource revenues. Our Business Segment Results provide a more detailed discussion of our segments.

18



Cost of goods sold - Cost of goods sold increased in the first half of 2015, compared with the same period last year, due to higher fiber and manufacturing costs in Wood Products and additional logging, hauling and depletion expense in our Resource segment as a result of our Alabama and Mississippi timberlands acquired in December 2014. This increase was partially offset by fewer acres sold in our Real Estate segment. Our Business Segment Results provide a more detailed discussion of our segments.
Selling, general and administrative expenses - Selling, general and administrative expenses increased in the first half of 2015, compared with the same period last year, primarily due to higher employee salary and benefit costs, including pension expense related to the adoption of updated mortality tables and a reduction in the discount rate.
Interest expense, net - Net interest expense increased $5.1 million, or 47%, in the first half of 2015, compared with the same period last year, due to the addition of $310 million in term loans in December 2014 to fund the 2014 acquisition of timberlands in Alabama and Mississippi.
Income tax provision - Income taxes are primarily due to income or loss from the TRS. For the first half of 2015, the tax benefit of $1.1 million is the result of the TRS’s loss before income tax of $2.6 million. For the first half of 2014, the tax expense of $13.4 million was the result of the TRS’s income before tax of $38.3 million.



19



Business Segment Results Comparing the Six Months Ended June 30, 2015 and 2014
Resource Segment
 
 
Six Months Ended June 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Increase
(Decrease)
Percent Change
Revenues1
$
98,066

$
91,417

 
$
6,649

7
 %
Cost of goods sold:
 
 
 
 
 
Logging and hauling
47,725

43,776

 
3,949

9
 %
Depreciation, depletion and amortization
10,918

6,399

 
4,519

71
 %
Other
12,725

11,362

 
1,363

12
 %
 
71,368

61,537

 
9,831

16
 %
Selling, general and administrative expenses
2,923

2,838

 
85

3
 %
Operating income
$
23,775

$
27,042

 
$
(3,267
)
(12
)%
 
 
 
 
 
 
Harvest Volumes (in tons)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog
739,527

722,915

 
16,612

2
 %
 
Pulpwood
79,124

90,703

 
(11,579
)
(13
)%
 
Stumpage
20,180

13,443

 
6,737

50
 %
 
  Total
838,831

827,061

 
11,770

1
 %
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog
296,837

237,765

 
59,072

25
 %
 
Pulpwood
447,863

368,965

 
78,898

21
 %
 
Stumpage
93,137

5,927

 
87,210

n/m

 
  Total
837,837

612,657

 
225,180

37
 %
 
 
 
 
 
 
 
Total harvest volume
1,676,668

1,439,718

 
236,950

16
 %
 
 
 
 
 
 
 
Sales Price/Unit ($ per ton)
 
 
 
 
 
Northern region
 
 
 
 
 
 
Sawlog 2
$
85

$
86

 
$
(1
)
(1
)%
 
Pulpwood 2
$
42

$
42

 
$

 %
 
Stumpage
$
9

$
11

 
$
(2
)
(18
)%
 
 
 
 
 
 
 
Southern region
 
 
 
 
 
 
Sawlog 2
$
41

$
42

 
$
(1
)
(2
)%
 
Pulpwood 2
$
34

$
32

 
$
2

6
 %
 
Stumpage
$
16

$
14

 
$
2

14
 %

1 Prior to elimination of intersegment fiber revenues of $22.5 million in 2015 and $26.5 million in 2014.
2 Sawlog and pulpwood sales prices are on a delivered basis, which includes logging and hauling.

20



Resource segment revenues increased $6.6 million in the first half of 2015, compared with the same period last year, primarily as a result of increased harvest volumes in our Southern region as a result of our Alabama and Mississippi timberlands acquired in December 2014. Total harvest volumes increased 16%.

Volumes in our Northern region increased slightly in the first half of 2015, compared with the same period last year, due to favorable logging conditions after spring break-up. Lower prices for sawlogs reflected lower lumber prices because a significant portion of our sawlog sales are indexed to lumber on a one to three month lag.

As a result of our Alabama and Mississippi timberlands acquisition, stumpage sales (cutting contracts) will be more common in our Southern region. Stumpage prices can fluctuate based on a mix of pulpwood and sawlogs. Stumpage prices increased in the first half of 2015 due to a higher mix of sawlogs, compared with pulpwood. Pulpwood pricing increased in the first half of 2015, compared with the same period last year, due to higher demand from pulp manufacturers as a result of unseasonably wet weather that reduced inventories.

Logging, hauling and depletion expense increased due to higher harvest volumes. This was partially offset by lower fuel costs.

Wood Products Segment
 
Six Months Ended June 30,
 
 
 
(Dollars in thousands)
2015
2014
 
Increase
(Decrease)
Percent Change
Revenues
$
173,424

$
188,376

 
$
(14,952
)
(8
)%
Cost of goods sold:1
 


 
 
 
Fiber costs
92,030

88,644

 
3,386

4
 %
Manufacturing costs
62,733

58,503

 
4,230

7
 %
Finished goods inventory change
1,781

(1,124
)
 
2,905

(258
)%
Other 2
12,812

12,566

 
246

2
 %
 
169,356

158,589

 
10,767

7
 %
Selling, general and administrative expenses
2,521

2,210

 
311

14
 %
Operating income
$
1,547

$
27,577

 
$
(26,030
)
(94
)%
 
 
 
 
 
 
Lumber shipments (MBF)
306,277

331,642

 
(25,365
)
(8
)%
Lumber sales prices ($ per MBF)
$
368

$
403

 
$
(35
)
(9
)%
1 Prior to elimination of intersegment fiber costs of $22.5 million in 2015 and $26.5 million in 2014.
2 Other cost of goods sold is primarily customer freight.

Revenues were $15.0 million lower in the first half of 2015, compared with the same period last year, due to lower lumber prices and lower shipments. Decreased shipments were largely the result of weak markets. In addition, we had outages related to two large capital projects in our Michigan and Minnesota mills.

Cost of goods sold fluctuated based on the following factors:
Fiber costs increased $3.4 million primarily due to higher log costs in Michigan as a result of strong demand by pulp manufacturers in that region, partially offset by lower fiber costs in Idaho and the Southern Region.
Manufacturing costs increased primarily due to labor costs as a result of annual salary increases and higher pension and benefit costs.
The change in finished goods inventory for the first half of 2015 and 2014 was the result of lower fiber costs as compared with the respective year-end market prices.

21



Real Estate Segment
 
Six Months Ended June 30,
 
 
(Dollars in thousands)
2015
2014
 
Increase (Decrease)
Percent Change
Revenues
$
13,856

$
30,176

 
$
(16,320
)
(54
)%
Cost of goods sold:


 
 
 
Basis of real estate sold
1,181

7,409

 
(6,228
)
(84
)%
Other
1,292

1,004

 
288

29
 %
 
2,473

8,413

 
(5,940
)
(71
)%
Selling, general and administrative expenses
1,263

1,114

 
149

13
 %
Operating income
$
10,120

$
20,649

 
$
(10,529
)
(51
)%
 
 
 
 
 
 
  
2015
 
2014
  
Acres Sold
Average
Price/Acre
 
Acres Sold
Average
Price/Acre
Higher and better use (HBU)
757

$
8,937

 
1,492

$
2,059

Rural real estate
4,402

$
1,134

 
24,024

$
1,093

Non-strategic timberland
1,134

$
876

 
1,066

$
804

Total
6,293

 
 
26,582

 
Real Estate revenues decreased $16.3 million and operating income decreased $10.5 million in the first half of 2015, compared with the same period last year. In the first half of 2015, we sold a total of 6,293 acres, including two commercial real estate sites included in HBU, which increased our average price per acre. In the first half of 2014, we sold 26,582 acres, including a first quarter 11,000 acre sale of rural real estate in Idaho and a second quarter 9,400 acre sale of rural real estate in Minnesota.

Liquidity and Capital Resources
Overview
At June 30, 2015, our financial highlights included:
cash and short-term investments of $10.6 million;
credit agreement borrowing capacity of $233.6 million; and
long-term debt of $629.3 million.
Net Cash from Operations
Net cash provided from operating activities was:
$16.7 million in 2015 and
$68.4 million in 2014.
Net cash from operations decreased $51.8 million for the six months ended June 30, 2015, compared with the same period last year, primarily due to the following:
Lower customer receipts of $25 million due to lower revenues in Wood Products and Real Estate;
Higher Resource costs for logging, hauling and other costs of $5 million;
Higher Wood Products log and manufacturing costs of $11 million; and
An increase in inventories of $10 million, primarily related to logs.


22



Net Cash Flows from Investing Activities
Net cash provided by investing activities was $6.7 million for the first half of 2015, compared with $33.7 million used in the first half of 2014. Short-term investments decreased $24.5 million in the first half of 2015, compared with an increase of $21.7 million in the first half of 2014, due to less cash provided by operations. Plant and equipment spending increased $5.7 million during the first half of 2015, compared with the same period last year, due to the completion of two large Wood Products capital projects.
Net Cash Flows from Financing Activities
Net cash used in financing activities was $19.2 million and $31.0 million for the six months ended June 30, 2015 and 2014, respectively. In 2015, net cash used in financing activities was primarily attributable to paying our quarterly distribution to shareholders of $30.5 million, partially offset by a $15.0 million draw on our revolving line of credit. In the first half of 2014, net cash used in financing activities was primarily attributable to the payment of quarterly distribution to shareholders of $28.4 million.
Credit Agreement
As of June 30, 2015, $15.0 million was outstanding under our revolving line of credit and approximately $1.4 million was utilized by outstanding letters of credit, resulting in $233.6 million available for additional borrowings at June 30, 2015. We plan to repay the revolving line of credit in the third quarter of 2015.
In January 2015, a financial covenant in the credit agreement was amended to increase the maximum allowable acres that may be sold during the term of the agreement due to the acquisition of additional timberlands in Alabama and Mississippi in December 2014. The following table sets forth the financial covenants in the bank credit facility and our status with respect to these covenants as of June 30, 2015:
 
Covenant Requirements
 
Actuals at
June 30, 2015
Minimum Interest Coverage Ratio
3.00 to 1.00
 
4.63 to 1.00
Maximum Leverage Ratio
40%
 
25%
Maximum Allowable Acres that may be Sold
480,000
 
13,115
Senior Notes
The terms of our senior notes limit our ability and the ability of any subsidiary guarantors to enter into restricted transactions, which include the ability to borrow money, pay dividends, redeem or repurchase capital stock, enter into sale and leaseback transactions and create liens. However, such restricted transactions are permitted if the balance of our cumulative Funds Available for Distribution (FAD), and a FAD basket amount, provide sufficient funds to cover such restricted payments. At June 30, 2015, our cumulative FAD was $69.9 million and the FAD basket was $90.1 million.
Contractual Obligations
There have been no material changes to our contractual obligations in the six